Why There's No Inflation and No Growth... (and why that's good for some)

Stocks were up modestly on Tuesday, as is the usual practice during the week of Black Friday Thanksgiving. There's a general feeling of well-being about, and, even though the gains this year have been the best since something like 1997, buyers of stocks know how to do nothing else, so they keep on buying. Actually, the turn-about in the inal half hour erased most of the day's gains on the Dow and S&P, especially. The NASDAQ finished above 4000, for the first time since 2000, when it crossed that threshold from the other side.

Stocks, bought with ridiculously cheap money via the Fed, are, and have been, producing fatastic returns for many investors and holders of pensions, 401ks, IRAs, etc., but the nagging suspicion that it can't really be this easy continues to gnaw at the fringes of consciousness.

For now, it really is this easy. There's no compelling reason to do anything but buy more stocks, not sell and keep watching them go higher. It's a very powerful positive feedback loop. The Fed's continuous debt-purchasing and zero-bound interest rates fuel the stock market, have contributed greatly to the rebound in real estate prices, but, stubbornly, unemployment simply won't go down appreciably, and that's an issue, though most of the barons of the financial world can't, or don't, really care about the ordinary citizens struggling to eke out a living.

Also troubling is the idea that all this debt-binge-buying by the Fed hasn't produced inflation, which, according to all Keynesian estimates on the topic, should be raging by now.

But, something un-funny happened on Ben Bernanke's way to the printing press. While the Federal Reserve and the behemoth banks have been busy leveraging up, the average American (and European) has been leveraging down, using the limited free money that comes their way to pay down debt, stop spending frivolously and horror of horrors, save.

Official statistics will deny that Americans are saving anything at all. Many, for certain, are not. In fact, HELOC loans are once again on the rise. But others, quietly, off-the-radar, have been squirreling away small amounts, mostly in cash, though some in gold, silver, bulk foods, and saving in other ways like repairing an aging vehicle instead of buying a new one, shopping at discount stores, buying online, bartering and other creative ways that are having an unseen impact because they are individually so small as to be unnoticeable, but collectively, they become huge.

Imagine, for a minute, the impact of 10,000 people individually not buying one Starbucks coffee per week. On the individual basis, it's three or four dollars. Collectively, however, it's $30-40,000. Then start adding up the other ways people are saving. Driving less or coordinating their driving to do many tasks on one trip. A couple of dollars a week. Home gardens that can shave $10 to $40 off a family's food bill in season is another hidden savings the statisticians can't capture with their computers. There are many, many more practical methods people are using today to save on everything from food to fuel to... well, you name it. Cut your own hair, heat with firewood partially, buy clothes at thrift stores, eat out less (or not at all), don't go to movies, and on and on and on.

The Fed doesn't get it. Wall Street doesn't get it. Most public employees don't get it. They're conditioned to be like their co-workers. Buy a new car, or lease one. Eat out for lunch. See the latest movies. Buy new clothes. They, and the 47 million on food stamps, are keeping the economy just clinging to life. But, despite the added liquidity by the Fed, it's not working so well. Corporations aren't beating their revenue figures. Bottom lines are good, but much of it is due to shrinking the number of shares outstanding via stock repurchase programs, which also add to the stock market boom.

But, there's a horde of people out there who are getting out of the system, cutting their cable bills, credit cards, magazine subscriptions, and, soon, because of the nightmare that is ObamaCare, their monthly health insurance bill.

Some, like economists at the Fed or analysts on Wall Street, might call these types an underclass. In reality, they are the new freedom class, untying the knot of debt, freeing their minds from the day-to-day toil and keeping up with the Joneses mentality that feeds the corporate machine.

The signs of frugality and savings - despite the overblown hype of Black Friday being bellowed by the big merchants - are everywhere. Gold, silver, bitcoin, eBay, Craigslist, barter exchanges, healthy, home-grown foods instead of corporate fast-food mulch, economy cars, hybrids and public transportation are all taking the bluster out of the Wall Street boom.

When the dust settles, when the Fed stops printing to infinity and the economy begins to normalize, there's an old adage used by printers, manufacturers and writers of software that will be apropos: "Garbage In, Garbage Out."

The garbage in is the cheap money the Fed has been printing nilly-willy. The garbage out will be a steady, possibly spectacular, stock market decline. It may not be a crash, happening all of a sudden, but there will be a bear market, eventually. After all, this bull run began in March 2009. It's now a 57-month old bull, which, by most measures, is a little long in the tooth. The signs are everywhere. Corporate profits are of exceedingly poor quality (garbage out).

When this era of cheap money comes to an end - and end it will - many who made money all along will be left holding stocks worth much less than what they paid for them. Many of the companies represented by these stocks will have upside-down balance sheets because of all the stock they bought back at nose-bleed prices. And that's going to be a real problem, causing more layoffs, consolidations, and bankruptcies (yes, we still have them). JC Penny will be the first to go. They're overdue and probably will file within months after the holiday season, which, for them, will be a disaster. They will be followed by Sears, and then after the retailers get moving in the wrong direction, the filings will snowball.

Garbage in, garbage out. Those who've been saving, rejecting the debt-slave system and prepping will be much less affected, already living well within their means and enjoying it.

Happy Thanksgiving!

DOW 16,072.80, +0.26 (+0.00%)
NASDAQ 4,017.75, +23.18 (+0.58%)
S&P 1,802.75, +0.27 (+0.02%)
10-Yr Note 100.36, +0.31 (+0.31%)
NASDAQ Volume 1.79 Bil
NYSE Volume 3.40 Bil
Combined NYSE & NASDAQ Advance - Decline: 3292-2338
Combined NYSE & NASDAQ New highs - New lows: 431-93
WTI crude oil: 93.68, -0.41
Gold: 1,241.40, +0.20
Silver: 19.85, -0.034
Corn: 424.75, -6.50