The Best of Times During the Worst of Times

The comments below are an edited and abridged synopsis of an article by Peter Schiff

A strong market usually reflects a strong economy. In the US, however, it’s an illusion, because the relationship between the stock market and the economy has changed. Strength in the market is driven by weakness in the broader economy. This rally is about the printing press.

The Best of Times During the Worst of Times | BullionBuzz | Nick's Top Six
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There is more stimulus than ever and interest rates at zero. Low rates push investors into stocks because they almost eliminate the returns available through fixed income. But these forces don’t explain why the current market is so strong. Covid-19 has created conditions whereby what hurts the economy and Main Street helps the S&P 500.

Fed stimulus is particularly helpful to large publicly traded companies. Smaller companies rely on traditional bank loans, which are often riskier than alternative uses of bank capital. Large companies are much better equipped to survive the Covid-19 lockdowns.

As the Main Street economy languishes, the Fed will continue the funding available for large business to borrow cheaply, while the pain for small business persists. This means that a bad economy is good for the stock market.

Cultural changes mean that offices, retail chains and theaters may never recover. People are comfortable working from home, shopping online and avoiding crowds. Almost a quarter of the 22 million temporary layoffs that began in March will become permanent. Some 2 million of those could remain unemployed into 2021.

But none of this has dented share prices.

As the Fed wades into uncharted stimulus territory, Fed Chairman Powell has announced that it will no longer raise interest rates to head off higher inflation. The Fed has no intention of raising rates anyway, but this gives it cover to do nothing if inflation shows up in earnest.

The US government will attempt to replace an imploded economy with an inflated money supply. This strategy hasn’t worked in the past, and it won’t work now. The dollar has never faced a test of this magnitude. Dollar weakness in recent months have many convinced that a reckoning is at hand. Buckle up.

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