Dow at 14000

The Dow Jones Industrial average crossed the 14000 line this week and is within a couple hundred points of a all time high.  The S&P 500 is closing in on a record as well.   Simply put we do not buy it.   

The economy has double digit unemployment, interest rates at record lows, and business activity that remains weak and those factors do not make for an all time high on any exchange.   History says that high stock prices occur when unemployment is low, interest rates higher, and business activity bullish.   Check any time in the past when the stock market reached highs and you will find those points of reference.  

So why is the market approaching a all time high.  Our opinion is that the Federal Reserve is to blame or praise whatever your point of view might be for the high stock prices.   History repeats, but history can not adjust for changes in policy and in this case the policy is the extremely huge amount of money being printed and pushed into the economy.   Every month without end for almost four years the Fed has been adding 75 billion dollars of stimulus into the US economy.  Now the total is in the several trillions and frankly has reached the point those huge piles of money are chasing goods and services with abandon.  All the food stamps, federal welfare, federal and state unemployment, disability, and so forth are making for some merry times for big corporations.  Note I said big corporations and not necessarily small business. 

All be it much of that money is per capita not very big, but enough to make big corporations that have become lean by closing plants and laying off workers to make nice profits.  For the first time in history we are witnessing huge amounts of unearned money chasing goods and services where there is no one working to make the money.  Think about that for a moment big corporations do not have to deal with the cost of paying employees, but can sell lots of products to those same employees they laid off who have money to buy their products.  Makes sense that profits are doing well with all that juicy Fed money out there being spent.  The point is much of this spending is unearned or just printed paper money.  Savings and labor produce goods and services which in turn allow the saver or laborer to use their earned income to buy those services. When that income is unearned sooner or later price points must move up to accompany the added currency in circulation. The only reason they have not up to now is the economy is so sluggish we still make too many goods for the money chasing it.  Profits are high, but volume of production is not.   Imported goods made cheaply are adding to this scenario.  

Now the Fed is pumping money, but when you read their minutes you find they are not happy doing so.  They are doing so because the US Government is spending with abandon and the resulting trillion dollars plus annual deficits.  Those 75 billion dollars monthly deficits not being bought by the public or foreign governments are being bought by the Federal Reserve in any attempt to keep interest rates down to stimulate the economy.  The added benefit is that the Federal Government gets to spend wildly with no concern for normal interest rates to finance the debt.  For the most part the deficit is costing nearly nothing interest wise at this time. 

Getting back to the stock market.  It is clear that what we have here is a sugar high that sooner has the possibility of giving us a huge downer down the road.   The Fed has it's hands full figuring out how to withdraw all this cash.  Even more troublesome is how the Federal Government figures out how to cut some of this excessive spending.  We have a rendezvous with destiny here and to us it does not look pretty.  The key for investors is your timing to exit stage left.  We have already begun to consider exiting some of our profitable corporate bond positions.