Why the Easy-Money Markets Will Soon End

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Guest Post by Investment Contrarians 

It seems like every day we’re seeing the stock market advance higher, which makes me wonder if traders are just trigger-happy and trading on the momentum in the market—and, trust me, there’s plenty of it. 

Whether you are a day, swing, or longer-term trader, there’s easy money to be made. The Federal Reserve has provided you with this great opportunity, so take it. 

The only issues that continue to cast a cloud over the situation are the state of the country’s finances, namely the national debt and the many municipalities and states experiencing economic hardship. Recall my previous commentary on the colossal financial crisis in Detroit. The city is burdened by a massive debt load, declining revenues, and a rapid decline in population migration that has spanned across more than three decades. But Detroit is not an aberration. There are other regions across America that have fallen into the same financial abyss. 

What really puzzles me is that the stock market is acting as if everything around us is faring well—which is far from the truth. 

The U.S. economy is not expanding at a pace that I would deem acceptable, given the reaction in the stock market. The media harps on about the fact that the growth of China’s gross domestic product (GDP) growth was only 7.5% in the first quarter, but that’s pretty darn good versus America’s GDP growth. 

The scary part is that the Federal Reserve, in all of its great wisdom, has been downgrading the country’s GDP growth as Chairman Ben Bernanke and the other Fed members clearly realize that the economy is in trouble. That’s why interest rates continue to be near zero and why the Fed’s bond buying is continuing. 

Not too long ago, the Fed estimated GDP growth would be 2.5%–3.0% for 2013, rising to 3.0%–3.8% for 2014. 

You must be shaking your head like me. There’s little chance these GDP growth estimates are going to be met. Recall the June Federal Open Market Committee (FOMC) meeting, when the Fed cut its GDP growth target to 2.3%–2.6% for this year. My opinion is that the estimate will again be cut once the Fed accepts that the economy is stalling. 

Just take a look at the first quarter, when the third estimate showed that GDP growth was a pitiful 1.8% versus the Briefing.com estimate calling for GDP growth of 2.4%. That’s a major miss. 

As for second-quarter GDP growth, I think we will be underwhelmed. All four components that make up the GDP are stalling. One key component is government spending; and with the sequestration and the push to cut the deficit, we know GDP growth will be soft. 

So continue to ride the market advance, but keep in mind that America really is struggling to grow. 

by George Leong, B.Comm.

This Why the Easy-Money Markets Will Soon End article was originally published at Investment Contrarians

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