Stock markets are rallying further this morning after a surprise bounce in China’s manufacturing and a better than expected ISM manufacturing report. The Chinese manufacturing PMI came in at 50.5 and above forecast of 49.5.
There is nothing to be excited about this number, the PMI has been boosted by China’s stimulus program and this stimulus has also boosted the stock market. The global economy is so weak that governments have to use unconventional measures to make the numbers look better. The US government is going in the same direction, if the economic numbers don’t improve they will tell the Fed to do QE. Why do you think the stock market is rising? Because investors expect QE.
QE was a new tool that was supposed to boost economic growth following the last financial crisis. After many years of QE the economy is still fragile and after QE stopped the economy started to weaken. Before QE the economy was doing fine, now the economy cannot function normally without QE, that is what we notice.
The question is: why does the Fed want to start QE again? If you care about the economy you would not do QE, but if you want to help the elites, and in particulars the bankers, make huge amount of profits from their investments you do QE.
This and the trade deal are the reason the stock market is not going down, there is a carrot hanging in front of investors. As we know, this time any form of stimulus will probably backfire, because if the economy started to lose steam after QE, adding more stimulus will make things worse. It can’t get better, because those who are driving the economy are the working class, the middle class, the masses of people on low salaries who consume and drive the economy and they are not benefiting from QE. QE is bad for them, social unrest is next. I fear the “yellow vest” movement in France will spread to other countries.
A healthy economy should grow without stimulus, if the Fed does QE again initially the stock market will probably rally because investors have not learned the lessons for the past but the economy will continue to decelerate. This is the dilemma, investors will be faced with two scenarios, do we follow the Fed or do we follow the economy? When it becomes clear that QE is bad for the economy, the stock market will collapse. Investors should focus on the economy not the Fed.
Meanwhile the rally continues, the S&P 500 is probably in a third wave up. The Elliott wave pattern suggests a rally in five waves [i,ii,iii,iv,v (circle)] before we reach the top. The rally should extend.
