By Nigam Arora
AFP via Getty Images
The stock market is likely headed toward a new high fueled by borrowing and money printing, European leaders have agreed on a recovery plan that will cost $2.1 trillion. In the U. S., another stimulus package is likely ahead. It is out of fashion to consider how the borrowed money will be paid back. Central banks stand ready to print as much money as they want — there appear to be no constraints on the central bankers, who are not elected.
The momo (momentum) crowd is celebrating by increasingly aggressive buying of the momo stocks. Prudent investors are asking: “Is there a limit?” Let’s explore.
The Dow Jones Industrial Average ETF /zigman2/quotes/208954582/composite DIA +1.34% , which tracks the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +1.34% , shows the following:
• It has broken out above the upper band of the support/resistance zone.
• The breakout is happening as RSI (relative strength index) is giving a buy signal. The combination of the breakout and RSI is powerful especially since RSI is not overbought. When RSI is above 70, it is considered overbought.
• From a technical perspective, there are no hurdles for the stock market to reach a new high.
• Before the great recession, the Federal Reserve’s balance sheet stood at $0.87 trillion. Now it is headed toward $10 trillion.
• U.S. debt is now about $26.5 trillion. When properly accounting for all the liabilities of the government, total liabilities stand at about $132.68 trillion.
Where is the limit?
The limit is determined by the following factors:
• Inflation
• Currency depreciation
• Difficulty borrowing
• Higher interest rates
• Social unrest
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