There is no doubt that is one of the most hated rallies in the history of the equity markets. Despite signs of economic recovery investors refuse to vote in favor of the U.S. economy with their hard earned money. Rather than jumping on the bandwagon and riding the bull the majority of investors remain hateful of the rally and refuse to accept the idea that everything is now fine after having been so close to the brink of collapse just one year ago.
But what has caused this extreme schism between Wall Street and Main Street? It’s quite simple in my opinion. Main Street sees the 60% rally as a fabrication that is the doing of those who helped cause the entire mess to begin with. Like a masterful cattle herder, the Fed has handed the banks billions in funny money and given these institutions and the investment public no choice but to chase the asset reflation trade. Richard Russell recently expressed his opinion on why the rally is so hated by both small investors and institutions alike:
It’s because many seasoned investors believe that the advancing stock market is a product of the various stimulus plans. That could be what’s wrong with that thinking? The problem is that nobody knows what this administration is going to do next. For instance, Bernanke says he will hold interest rates low (around zero) “for an extended period of time.” Now what in the devil does that mean? We all know that if enough pressure comes from Congress, Bernanke could raise interest rates tomorrow. In other words, big money, institutional money, doesn’t trust that market advance. They think it’s being “manufactured” by a Fed that is frantic to “beat the bear,” and they aren’t convinced that the Fed can pull it off. They also don’t trust Bernanke’s promises.
In other words, the general public is beginning to catch on to the reckless behavior of the U.S. Central Bank and the bank controlled Congress. While consumers continue to de-leverage and struggle with double digit unemployment it’s business as usual for the banks and the loose pursed Congress. The investing public is fed up with it and remains hesitant to put their hard earned dollars at risk in an equity market that they believe is being driven by the Fed’s funny money monetary policies. Russell elaborates:
Nevertheless, technically the stock market is acting well. So why not load up with stocks? I guess the same thing bothers me as bothers the institutional money. It bothers me to put my money in a market that I think is being manipulated with stimulus projects. And frankly, if I bought stocks here I wouldn’t feel like an investor, I’d feel like an in-and-out trader who’s trying to scalp the market with the help of what I considered temporary stimulus plans.
The stock market has evolved from a place of financial prudence and long-term planning into a place of “fast money” and trading. As we’ve previously surmised, this is all due to the boom/bust policy of Central Bankers who have created trillions in easy money which has resulted in excessive leverage, excessive debt and excessive risk taking. As opposed to achieving their goal of smoothing out the business cycle the Central Bank has in fact accomplished the opposite. And the investing public has voted with their dollars over the last 10 years – they’re tired of the boom/bust Fed policies and reckless government spending that do little to create an investment environment that is trustworthy for any time period greater than a few months.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.