Thursday, April 2, 2009

Enjoy The Rally -- There's More to Come

From a low of 6,547, set on March 9th, scarcely a month ago, the Dow Jones closed today at 7,978. That's a gain of nearly 22 percent off the bottom. Not bad for a single month!

What touched off this rally!

Begin with the Federal Reserve. The Fed has quadrupled its balance sheet and along the way created a surge in the monetary base. The Fed's announced decision to buy $ 300 billion in treasuries points to even higher growth in the monetary base down the road. Sooner or later, this explosion in the monetary base will translate into much higher money growth. Even in the short run, the monetary base expansion implies a huge boost to financial liquidity. The liquidity has to go somewhere. It won't go into new businesses. The Obama policies will see to that. Businessmen are petrified of the new administration and will refrain from taking any business risk with this administration's strident anti-business tone. Thus assets will receive a pop from this liquidity -- stocks first, then bonds, then raw land, and finally commodities generally. Unfortunately, not business. So, unemployment will grow and plateau at permanently higher levels. That is the inevitable result of the logic of the Obama Administration economic policy. Make employees toxic and they won't get hired (except by an ever expanding government).

What else? In late February, all of the major money center banks and the investment banks suggested that strong operating earnings will be reported for first quarter 2009. March was not as good as January and February we hear, but the numbers should still be better than most might have believed a few short months ago. If the financial system is producing very strong operating earnings, that is a good sign the economy is nowhere near as bad as the doom and gloom crowd think.

So, the rally will continue. Next stop 9,000!