09/24/2012 08:29 am ET Updated Nov 24, 2012

Free Floating Stock Prices

The stock market has risen to levels not seen since 2007 despite anemic economic growth, stubbornly high unemployment, a pending fiscal crisis and weak economic indicators from all around the globe -- and it keeps rising. One can only wonder what Wall Street investors know that the rest of us don't.

History suggests they are chasing moonbeams oblivious to economic reality just as they did during the dot com and real estate bubbles. They have investor money - other people's money -- to manage and the only way to manage it with any reasonable hope of profit is to invest it in the stock market. So that is what they are doing oblivious to the potential downside.

Part of the problem is the one I alluded to recently with regard to the Federal Reserve's latest adventure in quantitative easing. The Fed is pumping more money into the economy, but also disrupting financial markets. In a normal market situation, investors today would be fleeing stocks in favor of bonds, anticipating weaker economic performance to come. The news from Europe and Asia is not good. Most of the European nations are effectively in a recession already. And like it or not, our economy is irrevocably intertwined with the economy of the world. A worldwide recession will inevitably impact us.

Still, millions of Americans have wealth and must do something with it. The more cautious types would ordinarily be putting their money into money market funds, government bonds or savings accounts. But given the almost total lack of return on these alternatives caused by Fed policies, there is little profit to be had. People might as well put their savings under the mattress and hope they are still there in the morning.

There is yet another phenomenon further aggravating this market distortion - computer directed trading that fosters rapid gyrations of stock prices independent of real market conditions. Our national wealth is being managed on a daily basis by thousands of clerks locked onto computer screens issuing buy and sell orders based on minute fluctuations in stock prices according to sophisticated algorithms that presume to predict the future value of stocks. These actions are not based on real world knowledge of a company's strength and prospects, but simply the shifting tides of stock prices themselves. This system may produce positive results for individual traders in the near term, but the overall impact is to force up stock prices well above their true market value.

Andrew Brooks, a vice president of T. Rowe Price Associates, described the current situation as a "casino-like environment" that long-term investors have come to distrust. "It also seems many high-frequency trading strategies are designed to initiate an order to simply gauge the market's reaction and then quickly react and transact faster than other traders can."

We really need steady hands in Washington and on Wall Street to lead us through these uncertain times and help avert what promises to be yet another financial crisis. An inflated stock market rally built on easy money and irresponsible Wall Street manipulators does not inspire optimism.

Jerry Jasinowski, an economist and author, served as President of the National Association of Manufacturers for 14 years and later The Manufacturing Institute. Jerry is available for speaking engagements.