Wednesday, January 26, 2011

DOW trading around 12,000 points today, but what if stimulus dollars run out?

Many were waiting for this moment since June 2008, it has finally happened! The Dow Jones industrial average managed to break and trade around the psychological level of 12,000 points today.
Now where were we...

The 'State of the Union' address last night by president Barack Obama was received as positive by many investors around the world. Confidence in the US economy is growing from within and abroad. Since mid-August of last year the Dow really has been trending upwards (see chart below). A few years ago these levels were unthinkable when almost every economic report was filled with doom and gloom. The only thing that we seem to forget in 'exciting' times like these, is the 'what goes up must come down' saying. Are these 'natural' trading levels? Or are these simply the result of aggressive overspending and over investing by the government to get the US economy 'back on track'?
I'm afraid to say I think it's the last one.
Looking at the chart below I think the US economy is growing too fast, it's boiling over. We were in a pretty bad economic shape a few years ago, the great recession as it's referred to nowadays.
It seems to me that it is quite odd that the economic levels are all of a sudden back to where they were right before the great recession began (which is not that long ago).
Just because the government bailed out big banks and the auto industry etc, doesn't mean the problem is solved. Stimulus dollars eventually will run out and at what levels will the Dow Jones be trading then? What will happen when the US economy is pulled off life support and has to breathe on its own?
Many people that lost their houses,... well are still living out of garages or with friends or family, this group will never again be able to afford (or qualify) for another mortgage, this is a huge group.
Then there will be no bailouts or money anymore and then we are in some serious trouble. Then there will be so many spending cuts to save money it will be almost unbearable for the middle-class, let alone the poor. The gap between rich and poor will only increase and pretty much there simply won't be a middle class anymore. I think it's ridiculous already there is a term called the 'working poor'. If you work, shouldn't you be able to afford the basic necessities that are required to maintain a healthy living standard in a civilized, industrialized developed nation such as the US?
Then there are emerging markets like China and India that excel in economic growth and trade partners like Europe that are on the brink of falling apart. This weighs also on the US economy.
I hope this won't happen and I'm wrong, but looking at the chart and trending levels on a global level and within the US economy I expect a major pull back by the end of this year, beginning of next, close again to 10,000 points.

I just hope there will be another stimulus package...

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