Dow 10,000 Yippee! Now what?

There was joy in Mudville and in the halls of JP Morgan Chase as the Dow Jones reached the 10,000 level for the first time in a year. Hope springs eternal in the human breast as it is official that the worst of the recession is over. It has got to be the Fed minutes told us so. Dow 10,000 became like a magnet as traders could see in their sights the 10,000 Dow Promised Land and for a brief shining moment it seemed like all of our economic problems just went away and all was right with the world. This has got to be great news because the first time the Dow went above 10000 they gave away free hats. Anytime there are free hats involved you know it has to be a good thing.

Of course not being a guy that likes to be a downer at a party and it is not because I am bitter because I did not get a free hat. Ok maybe I am a little bitter but the real concern is what next. Now don’t get me wrong I am thrilled at how far the market has come. Dow 10,000 is an achievement that should be celebrated as it shows you how far we have come from the darkest days of the crisis. Fed Chairman Ben Bernanke and officials from both the Bush administration and the Obama Administration should be feeling pretty good about themselves and deserve credit for bringing the economy back from the brink. But the problem they have now is what next? Getting the Dow to 100000 is one thing but keeping it there is another. And getting back to the pre-crisis highs is a reminder of how far we have to go. The problem is not that we got to Dow 10,000 that is a good thing it is how we got there that raises the problem.

This has been a rally created by the printing of money. As the Fed and world governments flooded the globe with record amounts of stimulus and money it has stimulated the stock market and cursed the US dollar. Not only did the Fed print a floor in commodities their accommodative policies and buying back treasuries and mortgage back securities they created a bottom in the stocks. Yet the problem is that you cannot print yourself to prosperity for ever and the Fed and the Obama administration are soon going to have to make some hard choices and the type of choices that according to the Fed minutes they are not quite ready to make.

That was most clear when the Fed officials differed on the issue of the Feds Purchases of Mortgage Backed Securities. In the “Minutes” it said that “With respect to the large-scale asset purchase programs, some members thought that an increase in the maximum amount of the Committee’s purchases of agency MBS could help to reduce economic slack more quickly than in the baseline outlook.” In other word buy up more of those toxic securities from the banks and give them more cash to pump into the system and continue to help the banks bottom lines. Big bank bonuses may help stir more home and auto sales in post cash for clunkers world.

That kind of talk was loved by commodity bulls as the dollar would stay weak and drive up the cost of commodities oil included... Yet at least one member of the committee thinks we need to start getting off the sauce because in the minutes it said that the recent improvement in the economic outlook could warrant a reduction in the Committee’s maximum purchases.” In the end the status quo won out and the Fed agreed that it would continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets.

Of course can the status quo avoid an inflationary spiral? If the Fed acts too slowly can they stop the prices of oil from surging higher and higher. It is not getting the Dow to 10,000 that counts it is to create the environment where we can have growth that is not the result of the Fed pumping the system. To have demand growth for oil that is inspired by a more natural growth as opposed to this global stimulus or the Chinese just spend billions and billions of dollars to feed their frenetic growth.

Of course for oil inventories have been keeping us somewhat anchored. Unlike the gold market that is making all time highs the glut of oil is being restrained the weak dollar inspired bullishness. Last Night API data was a bit supportive and today’s EIA should give us some direction as the market wonder whether to follow through on Dow 10,000 or not.

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