The Stock Market Is Nuts!

The core inflation rate was expected to decline when announced on Thursday October 13.  Core inflation is more important than the regular inflation rate because it reflects inflation without energy and food.  The reason it’s important is that it indicates to some extent how much inflation has become embedded in the broader economy. 

If the rate came in lower than expected there would be some hope that the Fed might slow down its future rate increases.  If it came in as expected, well then the Fed would likely act as expected and raise rates in November.  However, if it came in higher than expected that would be bad news all around because it would mean the Fed would definitely raise rates in November and likely continue to raise rates for longer.

Well, the inflation rate came in higher than expected and as expected, stocks dropped – a lot.  The NASDAQ, which is the most inflation sensitive index, fell 3% on the futures market after the news was announced an hour before the market opened. 

However, something strange happened after the market opened.  It opened down 3% but immediately started to head up.  A strong move up that continued for more than an hour and a half at which point it started to go up rapidly for about an hour moving well into positive territory and closing up 2.3% for a total gain of 5.3%.  An incredible move!  And all in response to really, really bad news which was reflected in the numbers at the beginning of the day.

So why the big rebound?

Well, the TV commentators were scrambling to give excuses.  Looks like the market is “reassessing” the inflation numbers, right.  Yep, they have decided they like inflation in the afternoon, but they hate it in the morning.  Really?

Ok – maybe that isn’t a great excuse.  Maybe it was a short squeeze?   Sure, that works!  But why did it go up in the first place and continue to go up enough to cause a short squeeze?

Oh well, no answers there, but I can give you the real answer:  Up is good and down is bad.  The market greatly prefers up.  That reason for going up after very bad news might seem crazy on the surface, but underneath it makes lots of sense.  The market knows very well that it is better to go up than down, especially in a bubble economy and a bubble stock market.  A down market can get out of hand and… well go down further… and continue to go down. 

Especially with news like this inflation news, the market could easily pass the dreaded mark of down 25% for the year and rapidly approach being down 30% for the year, which would be the point at which the market could easily panic.  Panic means even more down.

So, in a very smart way, the market knows that to continue this amazing bubble stock market, it has to go up.  And that is very true. 

Down is bad, up is good.

I was waiting for one of the commentators or one of the smart market analysts they bring on the shows to say this, but no one did.

That’s also a sign of how smart the market is.  It’s terribly important that no one say a word about the real reason that the market is going up is because up is good and down in bad.  Do you really need an MBA from the esteemed University of Chicago finance school to know that?  No.  So, best to come up with any other excuse for the market to go up and never mention that the market is obviously nuts – completely nuts except for its desire to go up.

If you’ve ever watched the movie Dr. Strangelove and seen the part where General Jack Ripper explains in a letter to his commanding general that he has launched a massive nuclear attack on Russia because he is trying to protect the purity of essence of our bodily fluids from fluoride, you sort of know what this is like.  His commanding general, Buck Turgidson, while reading the note from General Ripper to the President explains that they are still trying to decode the meaning of Jack Ripper’s purity of essence explanation.  The President responds by simply saying the general is totally nuts.

Right now, the market analysts and commentators are trying to do what General Buck Turgidson was doing and explain why an obviously nuts market really isn’t nuts. 

But, have no fear, the market is truly nuts.  Except that it knows its own best interest – up is good and down is bad.