You Can Thank Ben Bernanke for 100% of the Stock Market Gains Since 2009

080519_USEconomy1My Comments: I’ve been a supporter of the PPACA or if you prefer, ObamaCare, since the beginning. My belief in it is based on the trend in place where health care costs consumed an ever increasing share of our national GDP and sooner or later would come a sticky end. Whether the PPACA solves the problem remains to be seen but a remedy had to be found.

The same is true of entitlement programs, as talked about here. What is lost, however, is the role to be played by demographics. As the baby boomers, those born between 1946 and 1964 leave the scene, there will be a relative lull in those needing these programs, leading to a counter argument in favor of entitlements.

But for now, the writing on the wall is pretty clear. It’s how we respond to the pressure that will ultimately tell the story.

Robert Lenzner, Forbes Staff

Here is the most important factual find about the stock market I’ve learned for some
many years: More than 100% of equity market gains since January 2009 have taken
place during the weeks the Fed purchased Treasury bonds and mortgages.

And conversely, during the weeks when the Fed did NOT buy Treasuries or mortgage
backed bonds, the stock market declined. Can you beat that? Credit to Michael
Cembalest, Chairman of Market and Investment Strategy for J.P. Morgan
Asset Management, for that extraordinary discovery.

Stunning, isn’t it, that you owe outgoing Fed chairman Ben Bernanke for making you
whole on your portfolio since the Great Recession ended. Get down on your knees
tonight and pray that his successor, Janet Yellen, will need to keep purchasing bonds
and mortgage securities to keep interest rates low and asset prices moving higher. That’s the short-term blessing that realistically must be phased out sooner or later. Maybe later as a result of the debt ceiling crisis we just experienced and its ramifications for the U.S. economy.

Longer term we face the ultimate test as the cost of entitlements is at an all-time high in relation to non-defense discretionary spending, which includes education,
infrastructure, energy, R&D, law enforcement and a wide number of exceptionally
important programs necessary for the nation’s well-being. That fiscal time bomb is
coming sooner or later. We must do something before mandatory programs require
100% of government revenues.

Here’s J.P. Morgan’s wise boss of investment management on his prediction of the
“grand bargain” required in the next 3-5 years, ie, not while Barack is president. Better mull this over. Cembalest believes the tax base will be broadened to raise revenues by having a “means-tested limitation on the ability to deduct mortgage interest, state/local taxes, charitable contributions and perhaps a modest tax on municipal bonds in exchange for some kind of effective curtailments in the entitlement system.”

I say the battle over this “grand bargain” will not be considered “grand” by anyone and cause ever so much more distemper and political uproar than we have seen in many decades. Just today, Christopher Wood of CLSA Securities wrote in his weekly
comments (GREED & fear) that “there remains a fundamental ideological divide in
American politics.” He calls the internal dynamics of the Republican Party “an overt civil war.” What will Wood call the war over entitlement reform that is mandatory sooner or later?

I was disappointed that Wood, a believer in gold for over a decade, has proclaimed that “the end result of zero interest rate policy and quanto easing will be the end of the fiat paper monetary system as currently constituted, and quite possibly also the end with it of the US dollar’s reserve currency status.”

Between Cembalest and Wood, then, we have some years to get our finances in order. The next next debt ceiling deadline is now believed to be in the June-July 2014 period. The best possible scenario for the stock market would be some solid QE buying of bonds and mortgages through the summer of 2014. Don’t fight the Fed as the stock market depends on the odds that Janet Yellen will continue the policies of Ben Bernanke.

SP500+QE

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