My Two Cents At A Discount

In the early morning, once again the Chairman of the Federal Reserve Ben Bernanke will give a speech and the market is awaiting every syllable to be uttered with bated breath. The reason? Because the markets are Ben Bernanke. Period.

At no other time in human history have the markets been so high. Record, after record, after record closes have been reached as of late. The reason? Not because the economy has reached “on fire” levels. No, nothing more than monetary manipulation better known as QE. (quantitative easing)

This is imperative to truly understand for today’s entrepreneur. Maybe there’s nothing one can do about it except as former Citi® Bank CEO Chuck Prince said, (I’m paraphrasing) “As long as the music is playing, you have to dance.” However, I’d follow that with, “OK, but (and it’s a very big but) If the music stops – you had better be able to find a chair – or you’ve got problems. Real problems.” As witnessed by the fall of both Citi Bank and Mr. Prince as they became poster child’s of the financial meltdown of 2008.

For all intents and purposes no other market shows the distortions taking place than the Russell® 2000 Small Cap Index. Once, this index was heralded as the measurement for the state of health of small business. It has since morphed into the index where most of the so-called “hot money” or “speculative money ” goes first in relation to QE money entering the market. Why?

Well, it’s been the main index referenced by the chairman himself as the one to watch. He’s said many times when questioned by congress if what he was doing was working or having a positive effect , (again I’m paraphrasing) “Just look at the Russell!”

So let’s look at it shall we?

Chart Courtesy of
Chart Courtesy of

The bottom left of that chart represents October, 2011 when the Russell was struggling to regain its footing from the last fall where QE 1 was supposedly over, and the markets were going to have to stand on their own two feet. Then the Fed decided no more of that and announced QE 4Eva.

The purplish horizontal line represents a level basically in the range where if you had a breath, and pulse (actually only one was needed I believe) you could get a loan.

Currently, we are not only above that. We’ve smashed through and continuing to go even higher – at a faster pace! This Tuesday was the 19th Tuesday in a row we’ve had no down day – just up.

For those not familiar with meteoric rises in stock market index values. Hint: You’re looking at one. Want to know what a “bubble” looks like? Again – you’re looking at one.

The Russell. The heart and soul of small business health is now at never before seen in human history highs breaking the 1000 level. Why? Because small business is doing that much better? Nope. Pure monetary policy cause and affects. And that is why it’s an issue not to be dismissed.

If this was going on because of the craziness caused and endured in the early 2000’s where real estate was being bought and sold hand over fist. Where cars were being bought at record paces, and money was flowing into the markets via 401K’s pushing things in a bubbilicious way as in 2007. That would be scary enough. (Remember how that ended?) However, all this is being levitated by nearly one man, and his word to keep the money flowing with no impediment.

For all the talk you’ll hear on “Money on the sidelines”, or, “Inflows are causing this rise” it’s bunk. To date, approximately $630 BILLION has out-flowed. $30 Billion has so far in-flowed. This type of talk even puzzled Charles Schwab® Chief Investment Strategist Liz Ann Sonders during an interview the other day. Where she stated the above figures.

I feel that with the precarious position the markets are now in. If Mr. Bernanke so much as hi-cups at the wrong time. Or wipes his brow the wrong way using the wrong hand, let alone utter the wrong phrase or word, the markets could react in ways no one expects. It’s all going to be in the hands of the HFT (high frequency trading algo’s) tomorrow.

Again, what one has to remember is this market is on fire for one reason and one reason only. The Fed pouring the fuel till they decide when or if they should pour any more.

What happens from here is anyone’s guess. Lord help me I never thought we’d get this far. Yet, here we are. However, that doesn’t mean one can turn a blind eye, or not pay attention. Being an entrepreneur means watching, thinking, and trying to anticipate moves whether good or bad, and how to deal with them as to find both safety – as well as prosper.

Watching the reaction in the Russel 2000 (aka The RUT) both during and after the chairman’s speech might be the first tell as to what we might expect over the coming months in the markets.

© 2013 Mark St.Cyr