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Thursday, March 13, 2014

The Stock Market is NOT the Economy

In this era of bubble stock markets, confusing the economy with the stock market is a big mistake many investors are making.

The three-year bear market in copper only serves to underscore this point. Copper reflects the real economy, which is actually in recession and falling. Consumer demand peaked in the mid-Naughties and has been falling at a rate of about 3% per year, according to the Consumer Metrics Institute.

But, why has the economy been mired in recession while the stock market has been “growing to the sky?”

The answer comes from the Fed's insistence on keeping interest rates as close to zero as possible. Companies have been borrowing at zero percent and using that money to buy back their shares. When shares are bought back it artificially increases earnings per share and makes it appear that the company is “growing earnings.” In reality, companies are pulling the wool over investors' eyes. Moreover, they are not investing in plant, equipment and labor to organically grow their businesses. By using debt as a lever to raise their stock price, they are doing the opposite of what a healthy company should be doing.

Investors have been fooling themselves to believe that earnings can be grown out of nothing. It's all a plot on the part of the Wizards of Oz (the Fed Governors) to inflate stock prices. When the curtain is removed, these companies will be seen for what they are: inflated bubbles which must collapse once interest rates rise.