The equity markets may continue higher in nominal terms but that doesn’t necessarily mean the real economy is improving.  Theoretically, if enough money is printed, the market could even reach new highs!  The market prices will grab the headlines but they veil what should be of greatest concern: real growth. 

The printing of enormous amounts of money is a fundamental event that can lead to higher prices.  Just because other more obvious factors, such as industrial production, home prices and so forth cannot be identified as causes for a market rally does not mean no fundamental factors exist.  The policy of the Federal Reserve has an overarching impact.

Essentially, the creation of money can lead to a boom in the short-term which is why some months ago we noted that a paradigm shift may have occurred and, in spite of economic weakness, the market could continue to power higher.  Such a boom is never lasting because its origination is not from production but contrived through monetary policy. 

So, what will be the result of printing so much money?  Increased volatility.  Volatility is exceedingly difficult for most traders to manage.  However, mastery of options facilitates risk hedging strategies and greater control. 

Moves of 30%-40% over the course of year will not be uncommon and has already been evident twice in the first half of 2009.  We’re here to help you master options trading so don’t hesitate to ask us questions.

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