The markets are now totally manipulated, or, you might say a floor was put under them. China has some real demand for commodities but much of their infrastructure build out is completed. They also have legendary overcapacity in most areas of manufacturing. Aggregate demand is actually way down worldwide.

Since the real estate bubble collapsed, the only bubble that could work was to reignite some kind of bubble in stock and financial markets, with $trillions of central bank money. Any bears were sent a clear message that shorting was not going to work out. So they backed off to an extent.
Since many people are not bullish on this market at the present time, mainly because of the recent 60% rally that is due to correct normally, who is doing all the buying?

We know that several major institutions such as Goldman and Morgan are in bed with the US Fed. Heck, a lot of senior Fed officers are former Goldman people. The Central banks appear to be cavorting with a handful of huge institutions with vast reach worldwide. No one can touch that level of power, particularly backed with a USD that can be printed by the $trillions at a whim, and in secrecy with little or no effect on the USD, because no one wants the USD to devalue – another story we talked about recently.

People with money have no safe places with yield left unless you want long term sovereign bonds. Short term interest rates are at virtually zero. What that means is there are few places to find yield, so pension funds, insurance companies and savers have little choice between zero interest or speculating in financial markets again. Thus, our 60 pct stock rally – but wait much of that was caused by easy central bank money. Will there be another flight to safety? If so, the only alternative will be negative real interest rates (interest rate – inflation).
The markets have so far avoided a crash but for how long?

It is telling that the Europeans, and Asians got together several weeks ago and vociferously called for a stronger USD and even intervened in the FX markets to support the USD when it fell below 77 on the USDX. It’s been hovering around 76 since.

So, the financial rally of recent months has been engineered. And of course, the economic data are skewed quite a lot, Example- the US and its 10 pct unemployment rate that is really 20 pct if based on the method used to calculate it in the Clinton era (just before Clinton). (It’s a Black box market – IE you do not know the true state of anything – you are investing blind, unless you have privileged information like Goldman.)

And that number is not improving either, although every time some tepid data improvement appears the market media bandies about it all day. IN short, you are not getting a real picture of what is happening in the US or even in China, as China is well known to vastly manipulate bank data, and way underestimates unemployment too, like the US.

Bad data = trouble for investors

What does such vast manipulation of markets, indices, and economic news do? It causes atypical behavior. And, people who use charting for example, see that their former methods are not working. So they sit on the sideline. Then, favored institutions with $trillions of central bank money worldwide swing the markets and make a ton of money, ex: Goldman’s record trading win rate of something like 98pct over the last quarter.  Who can pull that off? No one, unless you are given advance information from the US data reports and have essentially an unlimited war chest from the Fed.

When US rates rise

And the central banks are happy to allow that. Everyone else, not favored will essentially have to sit on the sidelines. Now, how long that can continue is open to question. One big question is what happens if US interest rates again start to rise, perhaps again only 1 pct on the US Ten Year Treasury. Will that sound a peak again on this latest financial rally? Watch for that in 2010.
US interest rates are poised to rise next year. One vital thing the Fed cannot control is longer term US interest rates like the 10 year T. Many economic commentators say that US interest rates should begin to rise on their own in 2010. So perhaps that is the limit of this latest financial rally. IE even if there is a moderate market sell off, say after Christmas, and then a natural rebound in 2010, that might not last long if interest rates start to rise in 2010. So far short term US rates have remained at zero basically (.25%).