The Fed can't save us
Bulls have pinned their hopes and dreams on extreme monetary policy easing. Economic data suggests it's not working.
On Wednesday, the Federal Reserve responded to the recent weakening in the economic data -- which they pinned on budget austerity out of Washington -- by announcing they have the flexibility to increase or decrease their monthly bond purchase rate depending on inflation and job growth. Currently, the Fed is buying up $85 billion a month in Treasury bonds and mortgage securities.
This, in turn, is subsidizing Washington's ongoing budget deficit (bad) but is helping the housing market post its best price gains since 2006 (good). And it's forcing investors to take more and more risk in the search for yield, pushing many stock market measures to levels seen during prior market tops.
Of course, this discussion misses the broader point: Since the Fed launched "QE3" last September, the recovery has lost serious momentum. Extreme monetary policy stimulus just isn't working on the real economy anymore. Yes, it's inflating financial assets, both stocks and bonds, which have disconnected from reality as corporate profit growth stalls and corporate defaults are set to rise. It's a classic bubble blowing scenario.
And it's not just here at home.
Spanish unemployment is above 27%. New Zealand building permits just posted the worst decline since 2011. South Korean industrial production dropped nearly 3% vs. a -0.9% consensus estimate for the third consecutive contraction. German retail sales are down. China's economy is slowing. Australia's economy, dependent on Asia and commodity prices, is slowing dramatically with manufacturing activity falling for 15 straight months to a four-year low.
Yet the market continues to ignore this as evidence builds we're in the midst of a bull market topping pattern. Consider that higher margin debt has resulted in cash balances at NYSE member firms dropping below the levels seen at the 2007 market top and returning to the extremes seen during the 2000 dot-com topping. Or consider that the ratio of assets in equity mutual funds and ETFs vs. money market funds (essentially cash) is approaching an all-time record -- exceeding the 2000 market top and returning to levels seen during the 2007 top.
The breakdown will come once investors realize that the Fed's cheap money stimulus is losing its efficacy, benefiting the economy less and less whilst accumulating more and more risk in the financial system as interest rates and stock prices lose touch with reality and no longer reflect realistic levels of corporate default risk, inflation risk, earnings risk, and market risk.
It could be starting. This is the fourth straight year in which the economy suffered a springtime swoon. But what's different is that the prior occurrences were accompanied by the Fed pulling back on stimulus; this time, the Fed is as aggressive as it's ever been. Here we are, five years since the financial crisis, and money is cheaper now than it was when the housing bubble was bursting.
That's not to say the situation is hopeless. Later today, my column will discuss a few ways President Obama and Congress can reinvigorate the economy.
Until that happens, the risks of a deep downturn continue to grow as the Fed, in its efforts to avoid the inevitable, doubles down on the strategy that inflated the dot-com and the housing bubbles.
For investors, I continue to recommend booking profits here and adding more defensive positions either in Treasury bonds -- via the iShares 20+ Year Treasury (TLT) or the more aggressive Direxion 3x Treasury Bull (TMF) -- or in cash or precious metals. For traders, consider short ETFs such as the Direxion 3x Small Cap Bear (TZA). Both TMF and TZA are in my Edge Letter Sample Portfolio.
Disclosure: Anthony has recommended TMF, TLT, and TZA to his clients.
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85 billion a month getting printed by ole Ben and the boys.
I hope you bulls are ready for double digit interest and inflation, cause it be on its way.
Maybe not in the next several quarters, but they are going to have to mop up the excess money supply eventually.
So after all this many years of stimulus, we are going to have a market crash anyways. On top of that, with all this money-printing, the value of the dollar has gone down .... doesn't seem like such a great plan. This is what you get when you try to jury-rig the economy/financial system. They should have just left it alone like they did back in the good ole days when things healed on their own.
Basically we are in a no win situation.
The political and industrial leaders along with Bernake are either ignorant of or ignoring how we got out of the Great Depression.
It is simple, in 1932 men were in soup lines waiting all day for a cup of soup and had no money. In 1942 men were in assembly lines producing war machines and had money to buy things. In 1952 men were in assembly lines producing consumer goods and had money to buy things. In 2007 men were in office jobs producing nothing and barely had enough money to buy things. In 2012 men were at home waiting for food stamps and had no money.
It is crystal clear what is going on here and no economist is saying it. You price things as if everyone was making $120,000 and pay people $11,000 a year (this is 29 hours of minimum wage a week) and your economy is going to be in terrible trouble.
Capitalism is at it's core totally unstable. Capitalism assumes the more agressive and successful people are going to start making more and more captial. The only flaw with this vision is that people like Bernanke can loan tens of billions of dollars to people like Donald Trump and let him go bankrupt 3 times and still loan him tens of billions of dollars when Donald has proven he will just lose the money. This is crony Capitalism and it does not work.
Our economy has totally collapsed the people who have been running the monopoly game have won all the money and are too greedy to let out more money as we go pass go to make things work.
Either wages for real people have to get closer to $120,000 a year with no price increases -- take the top 15 percent wage earners out of the average and the number is probably close to $20,000 a year right now. Do not do this average of $120,000 with the top 15 percent of wage earners in the equation as they will distort the numbers.
Or prices have to fall where the bottom half of wage earners who on average now make less than $14,000 a year can afford things. Homes that cost $8,000 cars that cost $1,500 dollars Health care insurance for a family of 4 for $400 a year.
Yep we are doomed and Bernanke is merely delaying the collapse and going to make things worse
Well I am probably in the minority here, but I do not believe, as many do, that the current bull market is only about the fed. I have a tough time buying the idea that so many money managers and investors are all willing to pay more on the logic of "well the fed is printing money, so stocks should keep going up". The reality is sort of the opposite. Everyone I talk to is cautious about fed policy and has been for quite some time. So where are all these "bernanke" buyers?
I think the markets are, as they almost always are, all about earnings and expectations. Most companies raised thier forecasts significantly at the beginning of the year. This is something I follow closely. In October of 2012, the S&P top-down earnings forecast for 2013 was around $100 per share. Today it's about $108. That's an 8% jump which happened virutally overnight and it coincided perfectly with the most recent bull run. I think this increase was very unrealistic and probably due in part to some euphoria after the lack of drastic changes to fiscal policy.
I keep one eye on the fed and have a finger ready to pull the trigger on bonds, but I suspect it won't be for at least another 6 months before it's time to pull that trigger. As for equities, the most important thing to watch for now, in my opinion, is how if and how quickly those 2013 forecasts get pulled back to reality, and to watch if the revenue numbers continue to drop despite the increases in earnings.
This insanity started long before Obama was elected. In fact the biggest reason the Global Feds have the pedal to the medal is the ongoing problem which is scam Derivatives. It's the gift from hell that just keeps on giving. It's so big and dangerous, the talking heads won't even mention it.
Now Uncle Ben states he might actually Ramp Up the Printing Press. Really.
I can't wait for a carnival.I am going to march in with my life savings and see if I can pull the lucky ducky.
The best thing that could happen to our country is someone needs to hack into the Federal Reserve and have the printing machines blow a circuit, print upside down backwards or just die.
None of us are old enough to remember the depression of the 1890's where the thought of let it heal itself played out. The "great depression" was nothing in comparison if the history books call it correctly. The great depression was solved by the industrialization of the war machine - not the manipulation of money. The public works projects had a great benefit to the country but were mainly a way to make sure men (and women) were able to send "honorably" earned money home to support their family. There were other advantages as well - getting the masses of people doing something productive while making sure anarchy didn't find a breeding ground. So here we are again, 100 years later with the same kind of lead up to the market crashing in 1929 and resulting depression. Only then it took almost 10 years for the "global" impact to send the world into poverty and war.
I was pissed that the bail outs happened at all and concerned that the "smart" folks figured we could print our way out of Freddie and Fanny and Lehman and derivatives'. But here we are, with all the key worldly banking persons rushing to devalue their currency, saving other governments from collapse by forcing austerity upon them. To bring the balance sheets back into the black - you need jobs that make the things we use - you need to reestablish the tax base. We need the reestablish the manufacturing, fabrication, mining and agricultural sector, because without these core base line sectors of the economy we have nothing.
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