The market farce is ending
Friday's jobs numbers reveal that, despite unprecedented money printing from global central banks, the real economy continues to stall.
Over the last few months, policymakers have been feeding investors a lie.
The lie was that cheap money -- which was responsible for the dot-com bubble, the housing bubble, the massive accumulation of government and household debt, and the epic erosion of the purchasing power of the dollar since President Nixon closed the gold window in 1971 -- would solve the deep, structural problems that ail the economy.
It wasn't just our Federal Reserve; it was the European Central Bank, the Bank of England, and the Bank of Japan too. But over the last 48 hours, I think we may have had our watershed moment. Stocks and other risky assets are dropping hard Friday -- as it becomes increasingly clear that monetary policy stimulus isn't working, that the economy is more vulnerable than the bulls want to admit, and that the illusion of market invulnerability is fading. Here's why.
For months, I've been writing about all that's wrong in the economy and in the markets (including "7 big worries about the economy"). But stocks kept drifting higher in a narrow breadth, no volume melt up enabled by mixed economic data and driven by a singular idea: That the central banks would inflate the market, so no point in fighting it.
But the lie is being revealed for what it truly is: A desperate, last gasp attempt by policymakers to avoid a second and potentially much scarier recession connected to the 2008 wipeout. It's no accident that, despite the fact the recovery is in its fifth calendar year, the Fed's policy stance is more aggressive now than it's ever been.
They are scared to death of a recession because we're so much more vulnerable now than we were in 2007. Government debt levels are in dangerous territory. Rich-world credit ratings are being slashed. The eurozone is in the midst of an existential crisis. Japan, with a debt-to-GDP ratio above 220%, is quickly approaching the point of insolvency. China, which doused its economy with cheap credit in 2008, is fighting simmering inflationary forces and a debt bubble.
And what of the U.S. consumer? The labor participation rate has fallen back to 1979 levels. Prices of necessities like food, fuel, and medical care keep rising. Debt ratios are still high. People are increasingly being forced to replace full-time work with multiple, low-wage and no-benefit part-time positions. The savings rate has fallen to just 2.4%. There are a record number of food stamp and disability benefit recipients.
If we fall now, there are no easy ways to get back up again. It's like a boxer taking an uppercut in the first round or in the fifth round. When you're already bloodied and dazed, it hurts more.
So, what happened over the last 48 hours?
On Thursday, the Bank of Japan announced it would essentially double its monetary base over the next two years as it pours fresh, high-powered money into the Japanese financial system. At a monthly purchase run rate of 1.1% of GDP; the BoJ's pace of purchases will be roughly double what the Federal Reserve is doing right now under its quantitative easing programs.
On the announcement, the Nikkei stock index recovered from its lows as Japanese government bonds suffered a dramatic intra-day whipsaw. First, 10-year government borrowing costs fell to nearly 0.3% after the BoJ announcement. Then the sellers came in, pushing borrowing costs back up to 0.65%. Some are interpreting this as a sign the stimulus efforts are backfiring and risk creating a sovereign debt crisis given Japan's deep indebtedness.
If the BoJ loses control of interest rates, without a concurrent improvement in the real economy, Japan will essentially go bankrupt -- as interest expense on its debt load absorbs all tax revenue.
The second event was Friday's U.S. payroll report. Only 88,000 jobs were created last month, well below February's 268,000 gain and well below the 193,000 Wall Street was expecting. The unemployment rate dipped to 7.7%, but only because more and more Americans are simply giving up and leaving the labor force in disgust.
Philippa Dunne of the Liscio Report notes we've regained 5.9 million of the 8.7 million jobs lost in the recession. But at this rate, it will take nearly three years to close the rest of the gap. That's not going to happen. Not with the risks that remain. Not with the economy's trajectory turning lower, like it is now on metrics like factory activity.
Soon, people are going to wonder if the abuse of the global monetary system -- with all the risks inherent to that strategy -- really isn't the deus ex machina many thought it was. People don't think stocks could fall into a bear market with all the money printing that's going on, and don't think the deposit confiscation in Cyprus was a big deal; just as people didn't think home prices could fall on a nationwide basis or that the collapse of Bear Sterns in 2007 was an indication of deeper woes.
As people awake from this fantasy, fear and panic will quickly set in. We're already seeing a rush into safe haven assets, with Treasury bonds pushing higher as smaller, riskier stocks collapse. For now, I continue to recommend conservative investors move to cash or Treasury bonds as more aggressive traders profit via inverse ETFs such as the Direxion 3x Semiconductor Bear (SOXS) or the ProShares UltraShort Semiconductor (SSG).
Disclosure: Anthony has recommended TMF and SOXS to his clients.
Be sure to 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 email@example.com and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.
I have said it for months. We are going in to another recession, if you even believe we came out of the last. This is the worst recovery in our history and has obama, pelosi, reid, and democrats written all over it. The failed policies of obama, pelosi, reid and democrats. And the fools that keep voting these piece of crap democrats in to office or reelecting them. The democrats are nothing but a cancer to our country.
I think Anthony makes some pretty good arguments, I just think his timing is a little off. Like other economic prognosticators, I believe he's underestimated the commitment of Bernanke to keep this thing artificially afloat. As long as inflation doesn't show up in the official gov reports, Bernanke will keep on adding more money. He has no choice at this point, lest he directly contradict every argument he's ever made and every position paper he's ever written throughout his entire career.
Even as a huge bear, it's not hard to figure out that today's jobs report should guarantee that QE will continue, unrestricted. This is good news for the markets, which should only head higher from here. Bernanke will continue to cover up the smoke damage with wallpaper, even as our house continues to burn. He has an endless supply of wallpaper, and as long as the fire doesn't get too hot, he can fool a lot of potential buyers for quite awhile, especially those buyers with blinders on.
Anthony with this story and the one recently about the poor having to pay more, sir, you will become unemployed very soon! You are not following MSN's guidelines to keep puffing up investors. Telling the truth here will get you fired buddy..
I've not looked into short funds until recently. I have to say I'm becoming antsy to go in.
an economy that allows the rich to horde all the money never works for long.now we start to feel the full effects of free trade.a labor class that cant demand a fair wage.the exodus of the countries manufacturing base that has been the backbone of our economy for a century.we simply must start making our own things again
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