Cheap money is all that matters

The liquidity addicts on Wall Street don't even try to hide it anymore.

By Anthony Mirhaydari Jun 28, 2013 2:14PM

Shopping cart full of cash copyright RubberBall, SuperStockThe last two weeks have shown that only one thing truly matters to the market: the flow of money from central banks. No one is really looking at the economic data at face value. No one is worried about the upcoming earnings season. No one is concerned about the problems in Asia caused by Japan's currency volatility.

 

All that matters is whether the Fed will taper QE3 or not later this year. Second to this is the situation in the Chinese interbank lending market. And maybe third is the prospect that the European Central Bank joins in with a quantitative easing program, too.

 

But they are all one and the same: ensuring that monetary authorities keep pumping cash into a system already spilling over with excess liquidity.

 

So while the Dow Jones has rebounded to flirt with 15,000, volume has been light. Breadth ho-hum. And credit markets remain weak.

 

 

Federal Reserve officials have been backpedaling from chairman Ben Bernanke's recent hawkish comments, saying a tapering of QE3 (which was only going to reduce the pace of bond buying to $75 billion a month or so from $85 billion now) is still over the horizon and will depend on the economy strengthening.

 

Markets were shaken because the Fed's forecasts of economic growth were so much stronger than the Wall Street consensus. Thus, investors and the media were confused about how to interpret this in the context of weak economic data. That made them nervous.

 

But now that the Fed is walking back that bullishness on the economy, and thus on the prospects of tapering, the markets are still acting confused.

 

Equities are enjoying a relief rebound because investors believe more stimulus will do good things. But commodities and fixed-income investors continue to believe the Fed will keep the taper or more stimulus won't stop the economy from stalling.

 

After all, consider just how much cheap money stimulus has been pumped in globally over the last few years, courtesy of Bank of America Merrill Lynch:

  • $12 trillion in asset purchases (bonds, etc.) by the five major central banks.
  • 520 central bank interest rate cuts.
  • $33 trillion in fiscal and monetary stimulus.
  • Lowest U.S. government bond yields in 220 years.
  • 50% (or $20 trillion) of the global government bond market trading with a yield of less than 1%.

Either equities are wrong or gold/bonds are wrong. Perhaps equities are discounting a Fed-fueled market bubble completely disconnected from fundamentals. If so, they could both be right. But for the wrong reasons.

 

If all this seems silly, well that's because it is.

 

How should investors react? For now, the medium-term downtrend remains intact. The Dow was pushed back at its 50- and 20-day moving averages as the 20-day is poised to make a downward cross below the 50-day for the first time since November. That's a big deal and a sign the downtrend is strengthening despite this week's relief rebound rally.

 

Other issues to consider:

 

Cyclical, economically sensitive stocks are continuing to roll over vs. defensive non-cyclicals. 

 

 

Real, inflation-adjusted interest rates have surged over the last two months -- as shown above -- and are now just starting to affect the economy. A recent story in the Wall Street Journal explored this dynamic, including the rise in 30-day mortgage rates from 3.7% last month to 4.6% now. While some, including analysts at Merrill Lynch, believe this could be a net positive if it encourages home and car buyers to bring forward purchases to lock in low rates; the classic textbook explanation is that this will be a drag -- especially with household indebtedness still so high. 

 

Similarly, we don't know what the impact will be on the Chinese economy of the recent drying up of bank credit as financial institutions horde liquidity amid volatility in inter-bank lending rates.

 

 

So for now, I'm recommending conservative long-term investors raise cash allocations and short-term traders focus on vulnerable areas of weakness, such as my Edge Letter Sample Portfolio short position against Blackberry (BBRY), which I added in May.

 

Check out Anthony's new investment newsletter, the Edge, and his money management service, Mirhaydari Capital Management. A two-week free trial has been extended to MSN Money readers. Click the link above to sign up. Mirhaydari can be contacted at anthony@edgeletter.c​​​​​​​​​​​​​​​​​​​​​​​​​om​​​​​​​ and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.


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72Comments
Jun 28, 2013 2:59PM
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Honestly, I haven't seen much of an improvement in the economy.  I hope things are improving, but I have doubts.  The cheap money keeps rolling along, and seems to skew the hidden trouble that lies ahead, and no one seems to notice or care.  My minds eye tells me it's time to hunker down and be on the protectionist side of things.  I think the Obama White House has ruined our economy along with our courts, our health care, and our most precious things, our privacy and our freedom.  The young folks couldn't care less.  
Jun 28, 2013 3:39PM
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And while you are being distracted by the fiat puppet show, the Senate just passed "immigration reform" with national biometric identification authorization hidden inside.  You will eventually do nothing (job, renting/buying a house/apartment, credit, cash transaction) without it.

Good job at falling for the show and not being on top of your congressional delegations.  Your privacy and liberty just took another hit.

Jun 28, 2013 4:09PM
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Tony is telling you what he sees with the real fundamentals of the economy and not the cloud of cheap money hiding all the bad that lurks behind it.The government of this great country is very much to blame for most of this mess.Throwing taxpayers money into the wind for wars that are not needed and giving money to every country with their hand out.Why was there not any restrictions on Wall Street after the last crash and letting them run it up again on stimulus and bad news(meaning stimulus won't be pulled anytime soon which is good news to these idiots)How about those last two GDP numbers for anyone arguing we are on the right path and check out the real time debt clock.We need balance not more debt.
Jun 28, 2013 2:47PM
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The market is going to get extremely nervous, shaky and twitchy,(wild ups and downs) everyone is trying to grasp as much of the cheap money as they can. The market will not totally tank as long as the Fed's printing press's keep printing but, when the Fed finally has to slow or stop the printing press's? The Fed can't keep interest rates near zero indefinitely, doesn't matter if the Fed tries a slow withdraw or goes cold turkey things are going to get very very rocky we are in extremely uncharted waters. A lot of people are going to get seriously hurt if they are not  careful. Do a slow withdraw or go cold turkey both options sometime's kill the addict, (market/economy). But till then enjoy the rollercoaster ride.   
Jun 28, 2013 4:24PM
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"...already spilling over with excess liquidity."

"...[added] $33 trillion in fiscal and monetary stimulus."

'...Fed-fueled market bubble completely disconnected from fundamentals."

 

Fundamental Ingredients of a 'perfect storm.'

Jun 28, 2013 3:50PM
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Looks a bit like extortion to me!  Need to cut Wall St. off!
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So, we all know Wall Street will fold when Ben stops with the money. Lined up with China, Europe, and Japan we will surely suffer as an economy and country.

So what is it that Ben and the boys are hoping will happen in the meantime to allow him to taper?

What am I missing? Everything is propped up, there's no solid ground.

Jun 28, 2013 3:30PM
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A little more advice, from a man certainly wiser than me:

Benjamin Graham's book, "The Intelligent Investor," which turned out to be about common sense. It has three lessons. The first is humility, that the future is uncertain. There are people on Wall Street who will predict the Dow will be at a certain level, but that is nonsense. The second thing is that because the future is uncertain, there's a need for caution.

The third thing was especially important. Graham values the idea that securities can be more than just paper. You should try to figure out the intrinsic value of a business. In the short term, the market is a voting machine where people vote with their dollars, but in the long term, it's a weighing machine that measures the realities of business.

I don't see where Anthony shows the slightest interest in lessons one and three, and he seems to be a little sketchy on lesson two.

Jun 28, 2013 3:02PM
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Cheap money isn't the only thing... notably, each time the Dow starts to head lower because it's dead, Bernanke's banksters whine cry and wet their pants until he gives them enough almost-free fiat money to bring it right back up. You've seen pictures of Dimon and Blankfein... it's wholly plausible that both have boo-boo faces and keep changes of underwear in the bottom right hand drawer with the "other" ledgers. If you're in, you're an idiot, which is below fool; so expect worse than a parting with your cash and you won't be disappointed.
Jun 28, 2013 5:16PM
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What does cheap money mean?  It means that if it continues, it will take a wheel barrel full of money to buy a loaf of bread and another one for the milk.  It means that all goods and services will be diminished to the point that money will be worthless.  It means that the paycheck that you get will not be worth the time or energy to get it.  This has happened in Germany and the results were catastrophic 

to say the least. Has anybody learned anything from history?  Is anybody listening?  What it boils down to is that you can not have more and more benefits and services without paying the price of having value.  Like the US currency has printed "In God we trust"  God help us all.  Because when everyone has lost faith in your money, you better hope that you have more than a prayer. 

 

 

f

Jun 28, 2013 3:46PM
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And finally for today, and I DO mean Finally,

This little gem was taken DIRECTLY from Anthony's newsletter, the Edge.

I swear, I didn't doctor this one bit.

 

Recent trades:

VelocityShares 3x Silver (USLV) -- 92.7% in 63 days
MarketVectors Junior Gold Miners (GDXJ) -- 34.9% in 63 days.
Golden Star Resources (GSS) -- 52.8% in 50 days. 

Those are pretty substantial NEGATIVE numbers Anthony.

I'll continue to follow old farts like Mr. Buffet, thank you very much. 

Jun 28, 2013 5:02PM
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All of this liquidity on the top is going to eventually crush everybody else.

 

How irresponsible. Stimulus doesn't function from the top down. It all just coagulates, creates a lot of unsupported weight, then collapses in on itself.

 

The quest for the world's first dollar trillionaire isn't going to ever come to fruition, and if it does, a loaf of bread is going to cost a million bucks.

Jun 28, 2013 6:22PM
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He says "So for now, I'm recommending conservative long-term investors raise cash allocations ", so in other words it's a good time to buy as you want to do exactly the opposite of his recommendations to make money.  Why?  Because he has a gift for being wrong!

A few reasons you might stay invested, at least short term. For now no change at the Fed, people are moving funds out of bonds to where (a good deal to stocks as where else can you invest money?), housing is strong and quarterly earning will be kicking off soon, which has been good.

Don’t take my advice and definitely don’t take this writers advice.  Do your own research or find a good adviser out there who offers sound advice in the market… W. Buffett would be easy enough to follow.

Jun 28, 2013 7:30PM
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buy bullets! They'll be worth more in the long run.
Jun 28, 2013 5:10PM
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Money is certainly not cheap to students, nor when you use your credit card to purchase something.  Mortgage and all other rates are starting to slowly ratchet up.  Past history tells a story of faster and faster rate increases.  Hold on to your wallet.
Jun 29, 2013 11:11AM
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"Real, inflation-adjusted interest rates have surged over the last two months". If we can earn real interest on money, money will move to America. We actually won't need the fed to stimulate. The fed needs to keep the real inflation between a deflationary 1% and 0 inflation. If we can earn real interest, interest rates should stay low. If we have inflation interest rates will be real interest plus inflation. Think about it in the economic world we live in dose the fed have a choose?
Jun 28, 2013 9:20PM
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Please stop talking !! You only present your winning picks... I've already lost near 50% of my savings thanks to your recommendations.. I do not know how they allow you to post on msn.
Jun 29, 2013 11:39AM
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Last night again, I tried posting with a thankyou and a compliment for the MSN's Contributors...

Funny thing, it didn't post either or wouldn't.

 

Maybe they don't like compliments, who knows.

May also be time frames ?  Around 4-5pm and again 11p-12 midnight.

Shift change ?....System goes on automatic ? For scanning. 

Jun 28, 2013 7:39PM
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To: Neon Guy.

First off, deflation is a real worry, in that nobody would be willing to 'take the hit' (i.e exchange paper bought at par for less, or negotiate for wage Decreases) to revive the general economy in such fashion.   Deflation leads to recession and isnt that what we have been fighting since the turmoil of 2009? 

For good or ill, 'cheap money' is all that we have had to combat asset depreciation.  It stopped the credit crunch which started immediately after the collapse of Bear Stearns.  It placed a safety net beneath all markets, stimulating price appreciation and re-vitalizing the 'wealth effect', not to mention preventing wholesale slaughter to my darling daughters' IRAs and 401Ks.  I have nothing to regret about the actions taken pursuant to FED policy to avoid a rehash of the Great Depression.  It has -despite what some are saying- 'worked'.

It has been said (by very wise sages of capital) that ..."a little inflation is good for the entire nation", but the same cannot be claimed for enduring the precursors to another round of
Hyper-deflation.  There exists in history one good reason why increasing liquidity by central banks was the 'cure', and it was the Great Depression, which Dr Bernanke has written his doctoral dissertation about, so may claim some expertise on the matter.

As for your second opinion, IF you really believe the market should "die" or experience a major re-set, perhaps you should be advocating MORE STIMULUS, so the ending would come more rapidly.  

I yet maintain,  some readings in Economic Philosophy and /or History would be in order prior to posting such spurious concatenations of 'reason', sir.

Thank you.

Jun 28, 2013 4:41PM
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 I feel bad for the fed your screwed no matter what they do. Don't cut back people wonder why do and the market freaks. Sooner or later you have to stop.
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