I haven’t posted in a while since there really hasn’t been much new to add that I didn’t say in my previous blog.  Stocks are continuing to move higher on pure momentum.  News, whether good or bad, seems to impact stocks.  It is a steady drip, drip, drip — that is, if things can drip up.  I still contend most of this is fueled by the power of 0% money.  Zero percent money encourages investors with money to take additional risks to earn something more, and nothing is wrong with that up to a point.  But we’re not really seeing a flood of money from traditional individual investors.  In fact, stock equity funds actually fell in August.  The ability to borrow at 0% is what is truly fueling the market.  I talked about this in my latest post, and I think you’re going to start hearing more about it — now that we are the cheapest place on earth to borrow.

I stand by the statement that I fear the creation of a dangerous bubble in stocks, some commodities, and lesser quality debt.  Left unchecked, I think things could implode again with 12-24 months.  And this time, I don’t think Bernanke or Humpty-Dumpty could put it back together again.

A subtle squeeze may be due

So, what should the Fed do about this, if anything?  I think the Fed should tighten – sort of.  I know coming from me that sounds insane given the state of the economy.  And, quite frankly, it would be political suicide for the Fed to start raising rates this soon, although I fail to see what damage a token rate increase of 50 basis points or so would do.  But they could certainly send a subtle message to the markets that they will not stand idly by (as they have in the past) and watch dangerous, over-leveraged markets develop all over again.  They could reduce their various borrowing facilities.  They could stop buying mortgage debt.  And, they could do various subtle things through open market operations.  While there would be no overt tightening, the markets would certainly get the message that the gravy train of 0% borrowing wouldn’t last forever.

Will the Fed be willing to be so bold?  Not at this time.  I do think it’s too early for that.  My preference would be for the stock market to cool, and some of the players in leveraged debt lose money on risk positions.  Not too much, though.  Just enough to remind everyone that the economy needs to catch up with the markets at some point in time.

How extreme is the disconnect between the markets and the economy?  David Rosenberg recently wrote that after past recessions and bearish stock markets, the recovery in stock prices equivalent to what we have seen this time has been realized, on average, three years after the trough of the recession and only after job growth has reached at last one million.  This time, we are perhaps three months from the trough, and we’ve lost 2.5 million jobs in the six month period.  Again, what makes this so dangerous is that this market miracle is being produced on borrowed money.

As mentioned in my post below, it has been over a year since Lehman, AIG, Fannie, Indymac, etc.— and absolutely nothing has been done by the government or regulators to prevent another taxpayer funded debacle in finance.  In fact, the government has almost enhanced the atmosphere that can produce a repeat.  If it weren’t so dangerous, it would be downright laughable.  Even The Daily Show gets it.  A couple of nights ago they had a clip of President Obama speaking about Wall Street and how we “need” to have regulations in place to prevent a repeat and how they are “working” on changes.

So where are the grown-ups?  Nowhere in sight.  But I’ll start the drumbeat for the Fed to tighten right here, right now.