Trader Talk

Why We Should Worry About Stock Rally


A rally in stocks, but the reason is worrisome. Stocks are up, the dollar is weak because market participants are making assumptions about the Fed and quantitative easing.

Simply put, traders think the Fed is going to start engaging in activities that the BOJ is entering into.

Traders have been passing around the English language translation of the Bank of Japan's statement lowering rates to essentially zero.

That wasn't what surprised traders—what surprised them was the bland statement that in addition to purchasing government bonds, the BOJ was now going into the business of purchasing EQUITIES. Here's the statement:

"As assets to be purchased, the Bank will examine long-term government bonds, treasury discount bills, commercial paper (CP), asset-backed CP (ABCP), corporate bonds, exchange-traded funds (ETFs), and Japan real estate investment trusts (J-REITs)."

The BOJ as buyers of ETFs and REITs? Yep. And traders think the Fed is moving in that direction as well.

That's the main reason stocks are rallying. And where will they get the money to buy all this stuff? They will print money. That's why the dollar is getting hit again.

I noted earlier that governments are in a global race to cheapen their currencies. The problem is that domestic demand is poor in developed countries, and still not strong in emerging markets. So everyone is relying on exports, but we need a buyer of last resort for the exports ... but if Americans don't have access to credit, something has to give.

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