The Flinchum File

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What Could Go Wrong?

02/21/2011

Let’s see . . . we have increasing estimates of inflation . . . we have an amazing amount of unrest in the oil-producing Middle East . . . we have slowing growth in corporate profits as they are squeezed by rising commodity prices . . . we have a rising level of foreclosures . . . and, nobody understands our system of national governance.

Nonetheless, the stock market is up 6.8% so far this year. A significant number of analysts believe it is the Fed who is driving up the stock market. Under QE2, the Fed buys bonds to keep down interest rates (and the cost of funding our national deficit). Interest yields are now so low that income investors find better income in stock dividends than bond interest. In addition, when interest rates begin to rise, the value of the bonds will decrease. As they shift into stocks, that drives up the stock market.

So, thank you, Mr. Bernanke! But, here is the bad news . . . QE2 ends in June. The jackrabbit stock market is too far ahead of the tortoise economy and needs to take a vacation by summer. But, what if the Fed decides on doing QE3? It will provide a “third wind” to the exhausted bull, which is not good!

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