Uncertainty Rules In This Managed Market Rally

Given the comparison between a traditional business cycle bull market and the current managed market rally, what could cause the rally to end? The key to the stock market rally is low interest rates. Therefore, the only thing that would force the Federal Reserve to raise its interest rates is rising prices (inflation). The average American believes inflation (prices) moves up when too many dollars are chasing too few goods. However, China's massive production and currency value manipulation neutralizes any possibility of this happening.

Another reason prices other than food and energy cannot rise is due to banks not lending, thus creating money. Finally, velocity plays a role as well. For prices to increase you need two things: extreme money growth and increased money velocity (spending).

Money must be spent on a rapid basis. Currently, the bulk of investor money has gone into mutual funds that hold bonds. Since March 4, 2009, $369 billion have gone into these funds (source: Newsweek). Both money velocity and money growth are currently experiencing very low growth rates. There is no reason for the Fed to raise rates anytime soon.

The current stock market rally would end in a New York second if it were not carefully managed. The Fed controls interest rates and bank lending, thus money creation and spending. Therefore, there will be no need for interest rates to move higher beyond a token increment until interest rates and lending are allowed to move with supply and demand.

There is a vast difference between a traditional business cycle bull market (of the past) and today's managed market rally. Favorable market comparisons and historically low interest rates are the only things really holding up the market. The latter is meticulously managed by the Federal Reserve. The rally will continue as long as interest rates remain low and profits rise due to low expectations.

Sincerely,
Kenneth Coleman