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Market Brief – Living in a Goldilocks Economy

Written by Keith Springer

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You’ve probably heard the term Goldilocks economy.  Who would have ever thought that the market would be so interested in that little girl with the curly golden locks. In actuality however, it’s really a metaphor for the economy in relation to the famous porridge tasting: not too hot, not too cold, but just right! Although, my favorite line in the story is when she wakes up, sees the three bears and runs away screaming. Even Goldilocks knows the difference between bulls and bears and to run from bears!

The Goldilocks type economy is the best of all worlds (according to the stock market that is) and just where we are sitting right now. We have enough growth to keep from dipping back into the abyss but not enough to make Ben Bernanke and his Federal Reserve troupe of financial puppeteers stop the printing presses. The market is essentially reliant on continued stimulus, and the biggest risk to the market would be the Fed quitting QEII early and/or the economy not needing a QE3 and a QE4. Depending on what the Fed does, or should I say, can get away with, will show us which of the 3 little bears to beware of: Inflation bear, deflation bear or stagflation bear.

The main goal of the Quantative easing programs has not only been to bring down interest rates, but to inject liquidity into the banking system to encourage banks to use this surplus liquidity to increase lending.  Unfortunately banks continue to hold the vast bulk of this liquidity on deposit at Federal Reserve banks and the amount of loans outstanding at commercial banks has actually declined. From a year ago, the volume of commercial and industrial loans is down -6% from a year ago and total real estate loans, (commercial and residential) is off -5%. If the US economy is going to come back strong and produce jobs, it is essential that credit expand. Given that the banks are afraid to lend and that aggregate demand will remain sluggish due to the deleveraging consumer and aging baby boomer who is past their peak spending years, the economy will continue to slog through the mud.

This Goldilocks environment will bode well for the markets for the moment, where the economy grows slowly, earnings stay strong and the Fed keeps dumping money creating a bigger and bigger bubble. Although bubbles eventually burst, they do give opportunities to investors who know how to play with bubbles. This creates a good chance to make some money here, but don’t throw caution to the wind. The 3 little bears are lurking.

That’s where we can help. Our active hands-on approach to managing portfolios can help you manage risk and deliver returns. Call me for a free consultation today at (916) 925-8900.

Regards –Keith

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