maandag 6 mei 2013

Potemkin Rally

The Potemkin Villages were Russian constructions, created to deceive others into thinking something is better than it really is.

The Potemkin Rally describes how the Federal Reserve is manipulating the market in order to create a deception of a rising stock market. It looks like the economy is improving, but it's actually just a mirage.

As long as the following chart (stocks divided by Fed Balance Sheet) stays flat, the stock market rally is really engineered by the Federal Reserve. If the Federal Reserve takes the punch bowl away, everything collapses.

I read about a very unusual correlation at Zerohedge. Apparently, there is a similarity between the employment to population ratio (red graph) and the Potemkin Rally (blue graph). (The Potemkin Rally graph measures the ratio between the stock market and the Fed's Balance Sheet.)

There are implications if this correlation is true. It means that when the U.S. government prints money (otherwise known as QE), the blue graph goes down (in a scenario where the stock market flattens out). If the blue graph goes down, the red graph goes down too, which means the unemployment rate goes up.

This means we are venturing into a paradox. It means that we get to a stage where money printing makes the unemployment rate go up instead of down. Janet Yellen's QE won't help employment.

But the alternative is equally bad. Not to print money could make the stock market crash, which will also result in a declining blue chart. So we are now stuck between a rock and a hard place.

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