About That Economic Mirage We Are Living Today

U.S. Economy Contracts in First Quarter of 2014. Someone Tell the Stock Market!Dear reader, yesterday we got the news that the U.S. economy “unexpectedly” contracted by one percent in the first three months of this year. This is the first time since the first quarter of 2011 that the U.S. experienced negative growth!

This news should come as no surprise to my readers, as I’ve been writing for months how my research shows the U.S. economy is slowing. Most obviously, U.S. companies had a terrible first quarter in respect to earnings growth. In respect to revenue growth, it’s nonexistent.

So why is the stock market rising? Well, it’s not really rising; it’s an illusion. Yes, we keep hearing in the news how the stock market is breaking to new highs. But if we look at the Dow Jones Industrial Average, it’s up only one percent so far in 2014. The Russell 2000 Index (a broader gauge of the market) is actually down 2.5% for the year.

And the money going into buying stocks is actually collapsing. In the first five months of this year, the volume on the S&P 500 was the lowest since 2007!

When you have a stock market rising on weaker and weaker trading volume, it’s a very dangerous stock market. In fact, in the last two months (April and May), there hasn’t been a day when volume on the Dow Jones Industrial Average was more than 500 million shares. In 2013, there were only seven days when the volume on the Dow Jones Industrial Average was less than 500 million!

The rising (or should I say “holding-its-own”) stock market has convinced the media, economists, government, and investors that all is well. This simply isn’t true, in my opinion. What we do have is a Federal Reserve that has interfered in the natural cycle of bull and bear stock markets by printing trillions of dollars in new money and keeping interest rates artificially low for years.

Those trillions of dollars in new money and those low interest rates have propped up the stock market as banks got rid of their toxic loans and major public companies were able to access easy money to buy back their stocks, thus engineering better per-share earnings.

In the end, I believe another stock market bubble has been created by the antics of the Fed. Sure, I might be the only one out there saying this…I might be the last “bear” standing.

And when you have the Fed supporting the market, common Wall Street wisdom is “Don’t fight the Fed.” But I’m just looking at the fundamentals and the way I interpret them. From what I see, this current picture of a Dow Jones Industrial Average sitting close to 17,000 as the economy contracts here in 2014 will not end well.