Too-easy money makes market too risky
The liquidity-fueled rally of the past 9 months is easy to like. But recent history tells us higher prices based on easy money carry extreme dangers, so a violent drop could lie ahead.
There is not much one can say to make sense out of the maniacal rise we have seen in the stock market since last fall, other than to note that the third and fourth rounds of bond buying by our Federal Reserve (aka QE3 and QE4) have boosted stock prices 20 to 25%.
Beneath the surface, however, stocks are a house of cards. Simply because prices are rising as a consequence of the massive liquidity injected by the Fed (and the Bank of Japan) – combined with "professionals" running other people's money who are terrified of not keeping up with the averages – does not mean that participating in the stock market at the moment is something that anyone who is sane ought to do.
The wrong kind of royal flush
Even so, resisting the siren song of apparently easy money is difficult, and most people eventually get sucked in. This is shown by the latest mutual fund statistics, which show that people are taking money out of bond funds and pushing it into stock funds.
It is not knowable when this maniacal rise in equity prices will come to an end. As I have stated many times, either the market has to exhaust itself, some sort of catalyst has to come into play or something has to stop the Fed. Obviously, the only thing that can take away the printing press is the bond market, and that will take some time.
As for "tapering," if the Fed tries to cut back its bond buying, my guess is that Wall Street would throw a fit and stock prices would tank, which would also hurt the economy. And if Fed Chairman Ben Bernanke and his colleagues are paying attention to the job market, nothing is occurring there to make them want to taper. Thus, I continue to think tapering is very unlikely.
He's just covering his basis
Perhaps Bernanke has an ulterior motive and wants to do a bit of tapering, if only to try to create the illusion that he's capable of being "tough." But I really can't speculate about that. I do know that printing money does not boost the economy or create jobs. All it does is misallocate capital, increase risk and precipitate inflation.
Meanwhile, many of those who were crushed in the stock and real-estate busts think we are in a Goldilocks (i.e., perfect) environment. In fact it is actually still 2009, just with much higher stock prices and a somewhat healthier banking system, thanks to taxpayer money and the fact that the Fed is stealing from savers via artificially low interest rates to give the proceeds to banksters. All in all, the financial environment is literally a house of cards built on runaway speculation.
Tuesday night, Japan was the scene of a fair amount of red ink, as its equity market lost about 4%, though the yen was quite strong. At least for the time being, those seduced into playing the easy-money game in Japan are seeing their financial dreams complicated by the fact that so many are all on the same side of the page. That problem will present itself in America at some point; we just don't know when.
Parenthetically, I think most people look at the fundamentals of the yen and say, "Wow, there is a currency that ought to decline." But in fact it has been rallying for the past month against the dollar, despite talk of tapering, and we can make the same comparison to the euro. I find it interesting that everyone can see the flaws in the yen and euro, yet for a while now those currencies have been doing better than the dollar, which so many people seem to think is still a sound currency. In any case, what this more likely illuminates is the wackiness of what transpires in financial markets in a world saturated with QE-created liquidity.
I am not the only one who thinks that beneath the shiny veneer of rising stock prices, the investing landscape has become fraught with risk. Many longtime successful investors do, as well. In his most recent newsletter, my good friend Fred Hickey shared a quote from Seth Klarman, founder of Baupost Group, that I found particularly timely and poignant. Klarman described the current investment environment as "… harder than it has been at any time in our three decades of existence … the underpinnings of our economy and financial system are so precarious that the unabating risks of collapse dwarf all other factors."
I suggest everyone read those two points a couple of times.
When the best offense is defense
At some point, the stock market will decline violently in a short space of time and there will be economic carnage in its wake. I continue to think that the computers that run so much money will eventually get loose on the downside at some point as the underlying economic and financial risks of the world rear their ugly heads. (Read “Every day, another flash crash” for more on those computers.)
Could it be two years from now? Yes, in theory, though I seriously doubt this can go on that long. I suspect the next nine months could be very pregnant – no pun intended.
In any case, folks need to be prepared for some serious carnage, even though the timing is not yet predictable.
Far too many Companies aren't investing in the Future, they are selling out our Future. Timing isn't predictable simply because they are always changing the way they play the Game. The rest of us are stuck with being the Punching Bag. The FEDS know all too well that they can't print to infinity and keep rates this low when Global Debt is this High. It's not even about when we will crash and burn but what can we do this time around to recover. This time, it won't be so easy to put Humpty Dumpty back together again.
The Wall Street banks have done tremendous damage to the future of the United States thanks to the repeal of the Glass-Steagel Act. Their tremendous greed and materialism was unleashed as a result of this event and ultimately led to the financial meltdown in 2008. The economy still has not recovered. Sadly, the Wall Street banks, thanks to the tax payer bailout and the Federal Reserve's zero interest rate borrowing policy, are doing swell again while thre rest of Main Street is in the toilet.
The genie may be out of the bottle, but there is some talk in Washington to reinstitute Glass-Steagel. Let's hope it may come to pass. And while thinking wishfully, it sure would be nice to see the interest carry trade put to an end. The interest carry trade is nothing more than a sham for rich hedge fund managers and private equity managers to avoid paying taxes at the regular rates.
"The purpose of QE was to dilute the currency to compromise hyper-inflation."
Quantitative Easing: is an unconventional used by central banks to stimulate the national economy when standard monetary policy has become ineffective. A central bank implements quantitative easing by buying financial assets from commercial banks and other private institutions, thus increasing the monetary base.
What do you THINK that means? It means they print more money as in-- DILUTE the value of all currency by making more of it. Those "assets" are bogus. After Goldman Sachs eliminated Quality and Assurance in the process of validating the Integrity of the instruments, none have Integrity. Unfortunately, the circle of life for 100% of the QE is fully contained in controlled and manipulated markets. There's nothing unconventional about it. It doesn't work. Therefore... it wasn't unconventional, it was TERRORISM.
I need a bigger vault to store my gold and precious metals.
Holding cash is foolish... holding stocks is boolish until the merry-go-round stops and holding bonds of any type is just plain ole stupid with 0 upside and a whole lot of downside.
When the crash comes... and it will... the only people making any returns will be the ones holding hard assets.
BUT IN TIME THEY WILL BE LEARNING TO AIM FOR THE HEAD!!!
The Fed's 85 billion dollar bond purchases every month into our market and sitting on +16 trillion dollar of national debt. Enough said as far as I'm concerned. I don't care to make stock market predictions nor will I say it will all end badly. I don't know what the future holds. However, I'm a fiscal conservative at heart and I still don't agree with current Fed policy. When Ben leaves his post and passes the baton, it will be interesting to see how things turn out.
"I've had good profits, mostly with bank stocks, and today I've suddenly decided to sell a good half of my holdings."
A good move, but please consider carefully what happens next. In reality, the markets are not up. The purpose of QE (Quantitative Easing) was to dilute the currency to compromise hyper-inflation. There's every chance now that the fully crippled compromised and diluted Dollar has no buying power left and QE was actually no different than a terror act that destroyed the majority of America. IF... there isn't a full scale rehiring, and millions of people who otherwise will cost the nation more than it printed are not gainfully employed and sustaining, the markets and banks evaporate. WHY? Because while we Eased through the paper formulated depression, every business in America sold it's assets, accumulated a record level of cash, eliminated operations and reduced itself to a paper and button pushing administrative platforms. Banks-- Finance, IT and Administrative platforms with ZERO portfolio and investment sustaining capabilities, are losing customers daily. You can all read. Two hikes- healthcare and auto coverage- wipe out more than 100% of the majority of household incomes. In 1905 when Loan Sharks did this to 4 out of 5 families in America, it shut the nation down. We didn't have a Fed in 1905 and most of America was rural and farmland where people could be self-sustaining. The nation collapsed anyway and it took a Draconian Act to unstick it. Everybody lost... banks, people, businesses and America. Today's scenario is far worse because banks processed the Fed's $85 billion AND put us on the hook for TRILLIONS more through the credit buy-back program. We do not have the GDP to out the sheer cost of the Fed's folly or the massive cancer bubble of market made millionaires from it.
Just know this... cash isn't king. It won't be anything very soon. China holds the most gold and can control the price in a downturn. Real estate is only valuable when people can afford to live or work in it, speculation buys you a box you get to pay taxes on and a force-revised Tax Code leaves you with no shelter or write-off. The biggest battle zones have been our own homes and the cities, towns, villages we live in. The enemy has tried to make us dependent on imports for existence. You WILL lose your stocks and bonds OR cash if you don't deploy it where it does YOU the most good... restoring where you live, unless you retired and moved South. Too bad for you, nature as well as business have duped you into dying in the boondocks. Before you thumb me down, ask yourself what you've got, after Wal-Mart is forced to abandon your town. It was part of the plan, and you swallowed it.
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ABOUT BILL FLECKENSTEIN
This column is a synopsis of Bill Fleckenstein's daily column on his website, FleckensteinCapital.com, which he's been writing on the Internet since 1996. Click here to find Fleckenstein's most recent articles.
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As the devil-may-care bravado of Wall Street marches on, history warns that -- in the end -- there will be the devil to pay.
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