Why The Market Increases When the Economy Declines

James West

Despite dismal earnings reports and anticipated GDP contraction of anywhere from 5 to 30 per cent (depending on who you believe), the stock market is on track to regain all that it has lost since March’s Coronavirus swoon, and continue back on its record run higher.

How is this possible?

The simple reason is that the Quantitative Easing has injected $2.3 trillion into the highest tiers of the financial system i.e. banks, who, since lending to companies with crumbling earnings is not an option, direct the funds into proprietary trading strategies that have no option but to chase stocks higher.

The absence of any choice, combined with the unprecedented explosion in liquidity, means stocks have no choice whatsoever but to go up.

It is important for us to bear in mind that our governments think that we equate a soaring stock market with generally good economic conditions. They tend to believe that we will blame ourselves for our personal economic woes if we can’t make money in a rising stock market environment.

The fail to comprehend that we view the selective subsidization of the banking sector for exactly what it is: corruption at the highest levels of government. Collusion among the Fed, Treasury and the banks.

Understanding that this is the fundamental structure from which the market’s value is derived, we are tasked with no more than to get a glove and get in the game.

Coronavirus, we must appreciate, does not have any ability to disrupt capital flows into markets. At least, not at its current level of infection and fatality.

What it does have the potential to do is create terrifying headlines in mainstream media, which can cause momentary gyrations in markets. But with the whole financial system utterly gorged on liquidity, it is just a matter of time until the laws of physics assert themselves over any momentary hysteria.

Increasingly, we see that while the virus does prove fatal for a small slice of infected parties, it is not going to ultimately cause people to hunker down and stop finding ways to make money. The blatant disregard of authorities’ advisories to distance and avoid crowds is all the proof we need to confirm that the urge to earn trumps the fear of infection for a large swath of society.

Also, we grow incrementally more enured to the misfortune of others, and even trend toward a fatalistic acceptance of our own misfortune, except of course where blame is offloaded to government and banks.

So while there is little we can do to reverse the insanity of the Fed and their circle of central banks from confronting the raging inferno of excess liquidity with the gasoline of more liquidity, we can learn to ignore the fundamentals that have taken a back seat in the world of economics, and learn to do ignore the naysayers, and just buy whatever stocks are hot.

As long as your lag time for getting in on any of the hottest trades is not too great, that is probably the best investment strategy you could possibly adopt in this uniquely red hot market.

Of course, having an information source of pro traders who are themselves obsessed with just such surges and  waves of capital flows is like having an ace in the hole. 

You can’t win if you don’t play.

James West

James West

Editor and Publisher

James West founded Midas Letter in 2008 and has since been covering the best of Canadian and US small cap companies. He covers global economics, monetary policy, geopolitical evolution, political corruption, commodities, cannabis and cryptocurrencies. As an active market participant, James is not a journalist and is invariably discussing markets...
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