Who We Can Thank for Dow Jones 13,000

inflation rateInvestors are excited about the fact that the Dow Jones Industrial Average has touched 13,000—a four-year high—as it rides the bear market rally higher.

Let’s take a step back, dear reader, and explore the reasons to justify this current stock market rally and growing bullish investor sentiment. Let’s see why investors (outside of my family of Profit Confidential readers) believe the market has been rising:

If we take the last few recessions before this one, gross domestic product (GDP) growth in the U.S. regularly exceeded 4.0% coming out of a recession, leading to a sustained stock market rally. Let’s see; 2009’s U.S. GDP was minus 2.4%, 2010 saw GDP at positive 3.0%, and 2011 saw GDP growth of only 1.7%. U.S GDP is going the wrong way coming out of this recession. Hence, while investors might think the economy is recovering, it’s not.

Maybe investors think that income growth is propelling this market rally. Real income growth provides the consumer with real purchasing power. Unfortunately, over the last four years, real income growth has fallen (see “Michael’s Personal Notes” below).

Okay, so it must be strong earnings growth then that is exciting investors about this stock market rally. Yes, many large corporations had a great 2011. However, in the final quarter of 2011, corporations reported their lowest earnings growth since 2008 and many are pulling back on their outlook for 2012.

Well, if it’s none of the above, it must be strong economic growth worldwide that everyone can thank for this market rally. Actually, my readers are fully aware that Europe is in a recession that has caused China and India to slow, which in turn will negatively affect growth in the U.S. (See: How the Massive Global Economic Slowdown Will Affect Us.)

Well, what the devil is propelling this market rally then, if it’s not GDP growth, earnings growth, income growth, or global economic growth? What is the origin of this growing bullish investor sentiment?

The answer is in the balance sheets of the major central banks around the world. They are all printing money, which has propelled this stock market rally.

In the last three years, the Fed here in the U.S. has increased its balance sheet (printed money) from assets just under $1.0 trillion, to just shy of $3.0 trillion today (source: Federal Reserve). In its last meeting, the Fed hinted that more quantitative easing could be on its way. Let the market rally!

 The Bank of Japan’s debt has almost reached a quadrillion yen! Wrap your head around that number, dear reader—I can’t! In U.S. dollar terms, since three years ago, the Bank of Japan’s balance sheet has gone from just over $1.0 trillion to roughly $1.9 trillion (source: Bank of Japan). And the Bank of Japan has hinted that it will continue to print money.

 The European Central Bank (ECB) has expanded its balance sheet—in U.S. dollar terms, from roughly $2.5 trillion three years ago to just over $3.5 trillion today (source: ECB). In addition, the ECB will discuss more printing at the end of this month through the LTRO.

 China has also participated in the unprecedented expansion of the world’s money supply, with its balance sheet rising from about $3.0 trillion in 2009 to just over $4.5 trillion today, in U.S. dollar terms (source: People’s Bank of China). Let’s not forget England as well, which announced just last month another $79.0-billion dollar injection, seeing its three-year balance sheet increase run to $513.5 billion, in U.S. dollar terms (source: Bank of England). The Bank of England has also signaled that more could be on its way.

 So, dear reader, one can buy into this market rally based on the expanding balance sheets of central banks in the hopes that money printing will continue amidst growing bullish investor sentiment, while the true economic fundamentals deteriorate rapidly. Or one can see that the house built by cards is getting too big to sustain itself further…and buy gold bullion and undervalued gold stocks.

 Michael’s Personal Notes:

Our neighbor to the north, Canada, just reported its annual inflation rate and it’s worrisome. The important items everyday Canadians need, like food and energy, continued their stubborn rise. The big drivers in January’s inflation numbers: a 4.2% hike in food and a 6.5% rise in energy, year-over-year.

Here in the U.S., the Producer Price Index (PPI) had its largest rise in six months in January, climbing 0.4%. In the 12 months to January, the PPI rose 4.1%. This means input costs for producers are growing at an annual inflation rate that is exceeding 4%!

Like Canada, in December, deep discounts by large American retailers helped bring the inflation rate down in January in the U.S, accompanied by less demand for heating oil due to unseasonably warm weather on the East Coast. In the meantime, however, in the last 12 months, food prices are up 4.4%, while energy prices are up 6.1%. These are very similar numbers to Canada. How can anyone say we are not experiencing inflation?

 Economists like to exclude “volatile” food and energy prices from how the inflation rate is calculated to create a “better” picture of the inflation rate (what is referred to as “core inflation”). Although I’ve never understood this concept and never will, if we play along, dear reader, for all of 2011, the inflation rate advanced 2.3%, which was the most since three years. I see inflation is showing up everywhere!

 As I write this, oil prices are exceeding nine-month highs as political tensions with Iran continue to escalate. If oil prices continue to rise, this will place severe pressure on the consumer, and will cause the inflation rate to ratchet up even further.

 Hourly earnings for employed Americans fell one percent over the past 12 months to January 2012. This means the average American consumer’s earnings are not keeping up with the 2.9% rise in the inflation rate, but rather they are falling one percent!

 With 70% of the U.S. economy being driven by the consumer and real wages falling, one has to seriously question how American companies can grow their earnings if the consumer cannot spend. All this just gives more credence to my theory that the market rally is not real. (Also see: Rising Food Prices Propelling Inflation Worldwide.)

 Where the Market Stands; Where it’s Headed:

 Let’s give thanks where thanks are due. World central banks have done a masterful job at increasing the supply of paper money over the past three years. This practice has expanded the bear market rally by a corresponding three years.

 In a nut shell, the Fed and other world central banks have fought the bear market in stocks tooth and nail. And in doing so they have simply managed to make the sucker’s rally we have been experiencing in the market more believable to investors…exactly what the bear market wants: more investors lured back into stocks before the bear takes their money away again.

 What He Said:

 “As a reader, you’re aware I’m not a Greenspan fan. In the years that lie ahead, I believe we (and our children) may pay dearly for the debt bubble Greenspan created during his tenure as head of the U.S. Federal Reserve.” Michael Lombardi in PROFIT CONFIDENTIAL, March 20, 2006. Michael started talking about and predicting the financial catastrophe we started experiencing in 2008 long before anyone else.