The real reason for the large, unexpected decline in interest rates since tapering began in January is that the economy never recovered from the recession that started in 2006. Consequently, current stock prices reflect a recovery that doesn't exist.
Large investors have gained awareness that the U.S. economy is at risk for a negative second quarter, which would officially move the economy into recession. While the Fed is busy propping up the stock market, large institutional investors are moving out of stocks and into the relative "safety" of Treasury bonds. While not apparent from looking only at the Dow or S&P 500, small stock indices like the Russell 2000 and the Nasdaq Composite and homebuilder stocks have been declining since early March. The average Russell 2000 stock is more than 22% below its 52-week highs, and the S&P 500 all time high has been reached despite fewer and fewer individual stocks setting new highs. The cash from selling the riskier small cap stocks is flooding into Treasury bonds, which is forcing yields lower.
The question that needs to be asked is, what will the Fed do if 2nd quarter GDP is also negative? As QE did not revive the economy, if the economy heads into an official recession, what policies will the Fed implement in an attempt to revive the economy?
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*Dave Kranzler spent many years working in various analytic jobs and trading on Wall Street. For nine of those years, he traded junk bonds for Bankers Trust. He earned a master's degree in business administration from the University of Chicago, with a concentration in accounting and finance. Currently he co-manages Golden Returns Capital, a precious metals and mining stock investment fund based in Denver. He writes a blog to help people understand and analyze what is really going on in our financial system and economy.
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