“U.S. growth has slowed to 1.3%. Greece and Spain are in recession and China’s economy has lost momentum for seven consecutive quarters and is now growing at 7.4%. At the same time stocks continue to rally and the S&P 500 Index (GSPC) is trading near its year-to-date high.
Gary Shilling, president of A. Gary Shilling & Co., calls this the “grand disconnect.” He tells The Daily Ticker, “Either the economies of the world have got to come to life and… rise to meet investor expectations or investors have got to come down to earth. The latter is more likely.”
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I agree with Shilling. I’ve said this in a previous comment way back that I believe the markets are disconnected from the economy.
The question for investors is: will the markets and the economy reconnect during an economic expansion, or during a contraction. Bernanke seems to be doing his best to ensure the former. The potential results may be as binary as you can get, thanks largely to the cheap money flowing through the system.
Combine that with the money that may be beginning to come back on shore into America (that much vaunted 1.5 trillion or whatever it is), and which surely will come as some point, and we could see something quite remarkable and largely unexpected.
Theory says government money printing causes inflation. But today inflation is low, what gives? Well, we’re calculating one kind of inflation and that is demand push inflation (your wages go up) which is low and that suits governments. But there is huge inflation in bonds, equities and commodities, which is where the money governments are printing is going. As long as governments print where else can the money go? Who cares about value as long as there is momentum. Nothing new here folks.
The money being “printed” by central banks is not for the economy; it’s for the banks. As Danielle showed in a previous post, money velocity is very low. For inflation (increasing prices) to occur, you need both excess money and high velocity, as I’m sure you know. We certainly have the excess money, but slow velocity. Your point about wages is on the mark. It certainly seems that the “machine” is doing everything possible to suppress incomes (case in point: illegal immigrants––sure, tell me they can’t put a stop to that if they really wanted to), which is an excellent way to manage demand-pull inflation, while also gaming higher corporate profits in an era of restrained spending. Some call it financial repression. Others call it neo-feudalism. Whatever you call it, it’s grossly immoral.
Yes the banks get the money. Remember “mark to market” because it has completely vanished from the current discussion. If banks did mark to market many of their outstanding loans and mortgages (assets) would need to be written off. They would become insolvent and would need the government money to satisfy their depositors (liabilities). But banks are notorious for not writing loans off and they simply consider them “non perfoming”. That lets them keep them on their books at imaginary values and they use the money they get from central banks to speculate. (That’s also why we have low money velocity.)
After the NEP I was investing in Calgary and we rubbed our hands in glee because we could buy real estate cheap. No way, the banks just sat on the properties and metered them back into the market over several years. How could they do that? They just raised their fees on everything to subsidize their costs. It’s a rigged game played by a bunch of bandits.
I these last few months before the election I believe the numbers out of the USA will see improvement and make Obama’s chances look better. Ultimately I think the government will massage the numbers to make Obama look better just before the election.
Thanks for posting this Danielle.
I like Gary shilling so much, especially his ‘contrarian’ way/call and he is ‘funny’ to watch too!
he has impacted me so much and has strongly affected my way of thinking and above all my investment strategy. I have to say I do NOT regret my decisions to date. I like him A LOT!
Thank you for being also a Gary shilling’s listener/fan and thank you for your website.
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