David McAlvany to Moneynews: Stocks ‘Very Dangerous’ for Investors

Sunday, 30 Sep 2012 02:24 PM

By Forrest Jones and John Bachman

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Stock prices have risen in recent years due to Federal Reserve stimulus measures rather than improving corporate and economic fundamentals, and investors who are betting on further gains are playing a “dangerous” game, said David McAlvany, CEO of the McAlvany Financial Group.

The Fed recently announced it will buy $40 billion a month of mortgage-backed securities from banks to pump liquidity into the financial system in a way that pushes down interest rates across the broader economy to spur recovery, a monetary policy tool known as quantitative easing (QE).

Side effects to such a policy tool — branded by many as printing money out of thin air — include a weaker dollar, rising stock and commodity prices and mounting inflationary pressures.

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Stocks have risen in recent years thanks to two past rounds of QE that have pumped a combined $2.3 trillion of inflation-fueling liquidity into the economy.

Corporate earnings have been solid, though cost-cutting measures can keep financial statements looking healthy for only so long.

“I think what we are up against is a stock market that does not reflect economic fundamentals. This disconnect is very dangerous for investors,” McAlvany told Newsmax.TV in an exclusive interview.

Editor's Note: Startling Proof of the End of America’s Middle Class. Details in the Video

Companies have already slashed earnings estimates looking forward, as the demand for goods and services just isn’t there, making top-line growth a difficult task for all sectors in the economy.

Meanwhile economic indicators point to a softening recovery.

Unemployment rates remain high, at 8.1 percent, while the Commerce Department revised its second-quarter gross domestic product growth rate to 1.3 percent from 1.7 percent.

The economy grew at a lackluster 2 percent rate in the first quarter.

The Dow Jones Industrial Average, however, has risen because of the stimulus tools, ending Friday at 13437.13.

“The business machine, if you will, has slowed considerably and that has not reflected in a 13,000-plus Dow,” McAlvany said.

“What 13,500-13,600 does reflect is massive speculation by a community that is hooked on cheap and easy credit and is reliant on Fed interventionism in the market.”

In the meantime, expect commodities prices to rise.

QE weakens paper currencies via injecting liquidity into the economy, making hard assets like gold and oil more attractive.

Food prices tend to rise as well, especially at a time when supplies are strained due to weather conditions such as the U.S. drought.

Other central banks have taken steps to loosen policy in recent years, including the Bank of England, the Bank of Japan, the European Central Bank and the People’s Bank of China.

While not all central banks have printed money out of thin air in the style of the Fed, none have tightened policy to a degree, meaning the global economy remains awash in liquidity with food prices ripe for further price increases.

“We saw food riots in 2008 when commodities were on the rise for other reasons and we saw food riots last year — the Arab Spring all across North Africa. These are very disturbing to us and to geopolitical thinkers,” McAlvany said.

Rising prices for rice particularly could lead to new food riots in some parts of the world, which would spell trouble for the global economy. This might explain why some central banks are favoring modest stimulus measures when compared with the Fed.

The European Central Bank, for example, unveiled a program to buy sovereign debt in troubled eurozone countries, though not with freshly printed money, meaning inflationary pressures won’t mount.

The People’s Bank of China has said it won’t rule out cutting interest rates and bank reserve requirements, but has yet to act as of late.

“They’re not pushing on this same sort of gas pedal now because they realize that with rice already having gone up 15 percent year-to-date, if they were to see another sort of round of inflation for foodstuffs — another 10 to 15 percent for rice — you’re dealing with riots, you’re dealing with political destabilization,” McAlvany said.

“That’s how sensitive the developing world is to food inflation, and this kind of operation in the marketplace is inherently inflationary.”

Editor's Note: Startling Proof of the End of America’s Middle Class. Details in the Video

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