Daily Archives: August 9, 2011

Stock Market Rally = Noise

There is one sense in which the gyrations of the stock market are not random or ambient noise:  large amounts of “money” leaving a falling stock market for cash increases the demand for cash.  This is deflationary.  Deflation is believed to be the chief adversary of the central bank.

So to discourage this cycle, the Fed is apt to keep interest rates low, and that’s exactly what they are doing.  Low interest rates discourage holding cash, or exchanging stocks for cash, because the only way cash “earns” anything is through interest.

So today all the big money Fed followers shed some cash and plowed back into equities.

The spectacle is probably over, for now.  The can was kicked down the road a little further, and no one is quite sure when we are going to run out of road.

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