A bubble has started to inflate and once again the Federal Reserve has a direct relationship with it. The markets have soared over the last few months as the SPDR S&P 500 ETF (NYSE:SPY) has gone from $104.50 to a recent high of $125.20. This move has lifted the SPY twenty percent. Behind the move is the Federal Reserve, printing and pumping money into the system to create an asset bubble. As they print, the Dollar declines and in response, all assets must adjust their prices higher. Higher assets like 401k’s make the average American feel richer and thus spend more. While they may feel richer, in actual terms they are not. As their investment accounts move higher, the buying power is adjusting lower. Most Americans have no perception of this but they will feel the pinch currently at the supermarket and when paying their energy bills. In the not too distant future, they will feel it in every other purchase they make. As the asset bubble inflates, common sense says eventually it will collapse.
While the Federal Reserve continues to push the market higher with their constant printing of money and propping of the markets, common sense marvels at the heights at which the markets currently trade. To understand that the gains in the market are built on a thinly veiled prop job is a scary thought, especially for those that have been through the last few bursting bubbles. The battle continues and will continue. Does the intelligent trader try and fight the Federal Reserve by shorting the market or give way and understand their prop job powers? The true answer is simple. The Federal Reserve will be able to prop the markets until something bigger happens. Once a shock hits the markets, the bubble will bursts. The bigger question is, when will that be?
Gareth Soloway
Chief Market Strategist
www.InTheMoneyStocks.com
