Bear Market Rallies May Look Better Than the Real Thing
The rally of the markets on the heels of a sharply weaker dollar and higher commodity prices may lure ever more investors back into the markets. Is this the real thing? For bear market rallies to work, they have to lure in investors and look better than the real thing.
As investors ponder that question, they may want to look at it from the perspective I discuss in my book SustainableWealth. The profit opportunity is one thing, but the more important question for investors should be: Can I afford to take this risk? Can I afford it should this rally not be for real, should it only be a bear market rally?
Policy makers are trying their best to make any recovery as inefficient as possible. In my view, this will make any recovery less stable. Add to that the problems we may face with inflation given all the stimulus that’s been created, I don’t see how the government can or will mop up this liquidity without causing serious damage to the economy and the markets.
In my assessment, either interest rates will go up because the Fed will have to fight inflation; or interest rates will go up because the market prices in inflation. If and when we see a good economic report – and there’s one bound to come at some point – there may be a very sharp sell off in Treasuries, causing the cost of borrowing to skyrocket. If this were the signal of a sustainable recovery, that may be good news; at this stage, the temptations for policy makers to prop up the broken system rather than to allow the market to build a sustainable bottom may simply not have arrived.
Axel
Axel Merk
Author of Sustainable Wealth
President and Chief Investment Officer, Merk Investments
