Stocks and liquidity

IF the current month of February turns out to be an up-month, that will mean that we've experienced eight consecutive months in which the S&P has been higher. This has only occurred ten times since 1926. Furthermore, six of those earlier strings produced a ninth up-month, meaning that February has a fair change of being an up-month.

Another amazing fact is that this string of consecutive rising months has occurred in the face of the majority of investor interest being centered in foreign markets. Fact -- since the beginning of 2005 a full 85% of all money going into mutual funds has gone into international mutual funds. And last year, according to Citigroup, 92% of mutual fund money went into international funds.

What's going on? What's going on is massive liquidity, greater than anything ever seen before. According to one fund manager discussed in Barron's, "The 'super-liquidity' cycle of the current recovery had unique antecedents. Mostly, it is a result of excessive Fed monetary stimulation that occurred earlier in the decade in reaction to the dot.com meltdown, the 9/11 terror attacks and fear in 2003 that the US might sink into the same deflationary abyss as the one that engulfed Japan.

"Only this time the Fed manufactured liquidity-surge became a global phenomenon because China and other emerging nations pegged their currencies to the US dollar. China has more than $1 trillion worth of foreign currency reserves, a large portion of them in dollars."

The result of all this paper money has been to levitate the markets of the world higher, and this includes the base metals, the precious metals, housing around the world, commercial real estate, and stocks in almost every nation in the world. On top of the surging liquidity, we have globalization as three billion people move into the modern world. This has set off a rush to buy up or tie up natural resources from South America to Canada, from Africa to Australia. It's as if some all-powerful spirit had suddenly swept across the face of the earth, unleashing forces never seen in these quantities before. Without the discipline of gold, "follow the money" has taken on a new meaning. The meaning is this -- never in all history has there been so much money to follow. Unlimited amounts of fiat money have washed over the planet, and, so far, nothing has halted the flow.

One of the main sources of this fiat money has been the Land of the Rising Sun. Japan has been fighting deflation ever since 1990. In the process of fighting deflation, Japan cut borrowing rates to an unprecedented zero while spewing forth multi-trillions of yen. Even now the yen provides an absurdly low interest rate of .25%. The low-return has driven the yen to a four-year low against the euro and the dollar. The "give-away" cost of the yen has created the so-called "carry trade," which allows speculators to borrow yen at practically no cost, and then turn around and buy a higher-yielding security. The continuing low interest rate on the yen has caused some to claim that the Bank of Japan has been "high-jacked" by business interests who want to continue with their carry-trade operations.

Then we have the hyper-spending with President Bush presenting a mind-blowing budget of $2.9 trillion. This from the San Diego Union, Feb. 3. "President Bush will ask congress for nearly three-quarters of a trillion dollars in new defense spending Monday, including $245 billion to cover the cost of fighting in Iraq and Afghanistan and other element of the 'global war on terror,' senior officials said yesterday." And I ask myself, can any currency hold together for long under this kind of wild spending? I guess we'll know soon enough. The US tower of debt continues to grow, incredibly our debt is costing the US over $300 plus million every 24 hours. We're compounding our way into either bankruptcy or runaway inflation. It's the same story I've been warning about for years. I call it "Inflate or Die."

In the face of this ocean of money, stocks, particularly foreign stocks, have headed for the moon.