Inflated Stocks

Inflation hasn't taken off like many have predicted. Why?

Where did all that money injected into the banks by the FRB go?

I think it went into the stock market.

I have a hunch that the big Wall Street banks just poured all that money into the stock market.

Into stocks like GMCR, CMG, LULU, ODP, SHLD, OPEN, WFM, NFLX, and PCLN. Take a bit of time to look at their 5-yr charts and P/E ratios and ask yourself if their valuations make any sense at all.

These are all overvalued stocks with sky high P/E's that are not justifiable even if we are entering the biggest economic boom in history. (which we are not)

So what does this say about the stock market? It is totally, unjustifiably inflated at the moment.

There are different types of inflation:

One is demand driven. The price of a good rises dramatically (becomes inflated) because current demand far exceeds supply. This is not what is going on in the market, as it is being driven by institutional investors, many of whom are required to be invested in securities and can only have a limited amount of investor money in cash.

Another is a monetary phenomenon, when a currency is devalued (by governments), each dollar in your pocket is worth less, and it takes more of those dollars today than it did yesterday to purchase the some product.

I believe the stock market (and commodity market) is reflecting the second phenomenon. It is absorbing, if you will, the affects of currency devaluation (QE1 & 2). In addition, all that money that is sloshing around in the stock market is not being lent by the banks, but rather sitting on their balance sheets in the form of trading securities.

This is a VERY RISKY situation. If REAL economic growth does not pick up DRAMATICALLY, the stock market is going to crash again. This will cause the banks to become insolvent once again as eventually, they will have to mark their securities to market, which will be dramatically less than they are currently showing.

If economic stagnation continues or another recession ensues, the question isn't if this will happen, but when. We also should ask what the catalyst may be.

Greek Default

Economic Downturn

Rapidly Falling Real Estate Prices

Municipal and Local Government Defaults

War In The Middle East (involving Iran and Israel)

Just a heads up...