The "Zimbabwe-isation" of the capital markets.

We are indebted to our good friend Dennis Gartman for putting one of our concerns into print. The S&P 500 has gained 61% since its low in March of this year. While this sort of rebound is not unprecedented, you have to go back quite a few years to get rough parallels.

The October 19th issue of Barron’s notes that this rally resembles the 1937-38 rally that ended in tears, ditto the 1974-75 market which was followed by a sharp sell-off.

What concerns us is that this rally appears to be without foundation in the “real” economy. Jobs are being lost at the rate of about a half-million a month. “Official” unemployment is universally expected to climb over 10% soon while “unofficial” unemployment is somewhere in the 17% range today. 50% of our youth can’t find jobs. Yet the administration is telling us that the “stimulus” has worked.

The price of homes (remember the housing bubble that triggered this crisis?) has not recovered and there are questions about whether the bottom has been reached. All the while records are being set in foreclosure-land. And now we are being warned of massive losses in commercial real estate.

And the consumer, representing 70% of the US economy is not, repeat NOT, opening his wallet unless the government give him an incentive to do so. So we have “Cash for Clunkers” which destroys perfectly good older cars that poor people could be buying, while pulling new car sales from the next month into this month causing a one-time sales blip that has no effect at all on annual car sales. It’s little wonder that consumers are cutting back on their spending, not knowing if they will be in next month’s half-million layoff cohort.

So what’s making the market go up? Well, that so-called “stimulus” money had to go somewhere and it didn’t go into road and school construction (remember those “shovel ready” jobs Team Obama promised?). Instead, with CD and money market rates effectively zero, it went into the market. Which gets us back to Dennis Gartman.

We make the case then that we are seeing what we have called the “Zimbabwe-isation” of the capital markets. For remember that as Zimbabwe’s leaders idiotically debased the currency into nothingness, its stock market soared because capital fled into “assets” rather than remain more and more worthless. Capital is flowing into stocks that shouldn’t rally because they’d rather “punt” there than park in dollars and watch their value deteriorate. Capital either leaves the US and flows abroad or it flows to equities, and it will continue to do so until such time as the Administration comes to its senses and chooses to do the right things rather than the wrong. In the perverse “Bizzaro” world we now inhabit, Obama is bullish of stocks because his policies are so destructive of real value.

As I recall, someone wrote about this not too long ago.