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 with the help of a chart.

The chart

Please click here for an annotated chart of Dow Jones Industrial Average ETF DIA which tracks the Dow Jones Industrial Average DJIA. It is a monthly chart so investors can have a long-term perspective.

Note the following:

• The chart shows the stock market has broken out decisively above the upper band of the support/resistance zone.

• The breakout is happening as RSI 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, as shown by the purple line on the RSI pane on the chart, it is considered overbought.

• The chart shows that from a technical perspective, there are no hurdles for the stock market to reach a new high.

• The chart shows progression of the Fed’s balance sheet — a fancy way of talking about money printing. Before the great recession, the Fed’s balance sheet stood at $0.87 trillion. Now it is headed toward $10 trillion.

• Not shown on the chart is that the 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. By some estimates, each taxpayer’s share of the liability is $860,000.

Where is the limit?

The limit is determined by the following factors:

• Inflation

• Currency depreciation

• Difficulty borrowing

• Higher interest rates

• Social unrest

• Public awakening

Right now, none of the above factors are in play for the following reasons:

• Inflation is low because of the way the government calculates inflation as well as artificially low interest rates and globalization.

• Currency depreciation has not been an issue because most governments in the world are engaging in similar policies…Please read more at MarketWatch.

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