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.

By Anthony Mirhaydari Apr 5, 2013 4:36PM

Arrows and Lights © DAJ, amana images, Getty ImagesOver 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).



The plain vanilla iShares 20+ Year Treasury Bonds (TLT) also looks attractive. I have already added the Direxion 3x Treasury Bull (TMF) to my Edge Letter Sample Portfolio.


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 anthony@edgeletter.c​​​om and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below. 

Apr 5, 2013 8:47PM
I've said it before and I'll say it again.  There is not one single politician in Washington DC that gives a "tinker's-dam" about our economy and how it effects us..  Did you or I screw-up the economy?  No! Of course not!  Those fools in Washington are responsible for the mess this country is in.  The worst part is that none of them worry about what will happen to the rest of us.  If any of them loose In the next election, they'll "retire" at full pay and all the health care they and their families will ever need.  Politicians only have one thing in their minds - getting re-elected and feeding at the public trough. 
Apr 5, 2013 7:39PM

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.

Apr 5, 2013 6:55PM
Went to 80% cash a few days ago.  The stock market is rigged, no question about it.  I will buy when there is blood in the streets.  
Apr 5, 2013 8:05PM
 Everyone knows these markets are rigged. It's the same as if the government was touting that the price for 1998 Oldsmobiles was $50,000 each, only because every time one came up for sale the government bought it for $50,000. But when you look at any other statistic that the government can't really manipulate very well, the truth is easy to see. That civilian labor participation rate chart says it all.
Apr 5, 2013 10:09PM
Only one comment from me: Stay out of debt yourself!
Apr 5, 2013 8:51PM
Anthony makes some sound, logical arguments and backs them up with data.  There are plenty of others who take a contrarian view, who also back up their arguments with sound data.  Listen to the arguments and decide for yourself.

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.

Apr 5, 2013 9:52PM
Although I love my Senator, Mayor,  Soldiers, Policemen, Firemen, Parks workers and Clerks the public feeding trough is a big problem. I don't mind them getting the REASONABLE pension they deserve as long as the funds are invested wisely and Joe the non union factory worker doesn't have to pay for the majority of it when things get bad. Federal, State, City and Town Government pensions are crippling budgets in a trickle down effect and BALLOONING at a doubling tripling quadrupling rapid rate faster than in years before and getting worse and John Q Private is paying for it. Throw in numerous unfunded mandates that also trickle down and its a wonder more Stockton Ca haven't happened yet or are about to happen. Should be interesting to see how it all plays out in court. Public Pension haircuts may set a new precedent. Bankruptcy may be the only answer for serious reform sad as it sounds. The PO is complaining the main problem they are practically insolvent is 50yr future benefits monies having to be set aside for future retirees. Might be how it has to be for every public pension funded by cutting bloated government spending on every level, future hires and current workers taking cuts to pay and benefits and YES higher taxes for all. Really we Americans have had it pretty good for a long time while other countries have delt with higher tax rates, pst gst you name it. Oh and while I'm on my dream wish list cut and reform medicare, medicade, welfare and social security. Also elected officials should be a privilege not a golden parachute. 
Apr 5, 2013 6:42PM
I hate to break this news to you Anthony, but the Largest Global Economies are already Bankrupt. Yet in spite of that, Corporate Cash has soared on the balance sheets along with Profits. All this without leaving much if anything for the average worker. Clearly Trickle Down Economics doesn't work..
Apr 5, 2013 8:47PM
When paper money is cheap it is worth nothing.....and even less saved....
Apr 5, 2013 7:41PM
Treasury bonds a safe haven??? Default is a far greater likelihood than repayment. With the FED already pumping $85 billion in freshly printed greenbacks monthly, and the economy going on the skids. They'll be printing a lot more. If they don't default what they pay you back with will be monopoly money. Hard assets and hard asset producers will weather this coming fiasco.   

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.

Apr 5, 2013 7:19PM
Mr. Mirhaydari, do not expect to be employed by MSN for much longer.

The left, when confronted by such information, 
1. either deny it's existence.
2. call you a gloom and doomer.

Anybody with a lick of sense knows this bear market is going
to come to a screaming halt.
Apr 5, 2013 11:54PM
I want to know what happened to the people who made profit and walked away and caused the crash. Why isn't the government making them accountable? Probably it would cost the tax payers too much money to prosecute. Only in America you can screw everyone and walk away rich.
Apr 5, 2013 11:24PM
you ain't seen nuttin yet..look at the price of gas and oil. look no farther, there lies the problem, no disposal income left after you heat your homes or put gas in for work, if you have a job.....obamanomics
Apr 5, 2013 10:31PM
That´s conventional straight reasoning, conclusions may be accurate long-term, but it´s crucial to factor in the enormous power of governments and their central banks, because of their ability to handle structural monetary variables. If employment is weak in the US, the Fed is likely to react intensifying its money printing policy. It may not result in more jobs creation, but it can lead to a dislocation of the nominal prices curve, including stock prices. It may lead to higher nominal prices, even if we see a decline in real acquisition power, meaning, even if the Fed fails. And that is what makes going short extremely dangerous. If one makes a timing mistake, it may be fatal. In 2007 banks went broke and were rescued by governments, now those governments are highly indebted but it´s not a comparable situation. Governments may never go formally broke, at least those who have money printing powers and it makes all the difference.
In other words, we can´t predict the result of a game if one of the players has the power to change the rules anytime at will.
Apr 5, 2013 11:20PM
To all food stamp haters   one fact     in 2006 when there were jobs   they were working
Apr 5, 2013 6:27PM
The frog in the beaker is slowing down!!! The Serferdude
Apr 5, 2013 5:50PM
Tony, Tony, Tony, how you doing covering those shorts?
Apr 6, 2013 1:55AM

an economy that allows the rich to horde all the money never works for 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

Apr 6, 2013 2:40AM
Gee Anthony, where're you been, it was already obvious when the market went over 13,000 with nothing to substantiate its rise. This administration and The Fed Reserve have been touting and propping up the inflated and overvalued market hoping to draw more suckers in.  Oh well, at least you got on board now, congratulations. Now comes the reality.
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