Quite often, I’m asked that if the world is “going to hell in a hand basket” why do the U.S. financial markets continue to go higher?
I respond by saying that most other central banks of the world demonstrate their dedication by trying to maintain stability and preserve some level of normality in their country or union.
Their main focus, unlike the Federal Reserve here in the U.S., is not to artificially elevate the stock markets.
Ben Bernanke, on the other hand, has operated under the misguided belief that the so-called “wealth effect” that is now raising the markets will somehow return the populous to spending mode. With the goal of persuading the U.S. consumer to continue to borrow money in order to increase retail sales, the theory goes that if you keep the markets up by injecting the banks (the buyers) with cash, it will somehow influence American shoppers to disregard their current dire situation of no job, no house, and no future.
Yet, as retail sales decline, manufacturing decreases, employees are downsized, and incomes are reduced, the economic cycle of less and less growth pervades. As a result, the ultimate “straw” that breaks the camel’s back and collapses the financial markets could very well be the economics of the retail consumer.
As lines are drawn in the sand regarding Iran’s nuclear capability, we continue to hear that tighter and tighter embargos will be imposed.
In addition, Israel continues to practice their attacks and gasoline stays elevated, could this be the “straw” that ultimately brings the markets back to reality? Keep in mind that 40% of revenue from U.S. corporations comes from overseas.
At long last, American CEOs are admitting the impact to their bottom lines caused by both the Asian and European implosions.
As the disappointing third-quarter earnings reports continue and discouraging projections for the fourth-quarter are starting to be announced, this now becomes the possible back-breaking “straw.”
The early part of the 20th century featured the “Powder Keg of Europe,” which was just waiting for a spark.
At that time, many people contemplated the event which would ultimately occur, engulfing a continent in a world war.
Money, trade, land, and honor were all mentioned, but nobody really thought the assassination of a minor member of royalty could get things started. Yes, everything was primed and ready, it only took a “straw.”
Much like today, could the final “straw” not be economic in nature, but simply an act of God called Hurricane Sandy?