Why the stimulus can never stop

The market's cheap money addiction is laid bare. No one knows how it will end.

By Anthony Mirhaydari May 22, 2013 3:50PM

The ridiculousness of this market was on display Wednesday as turmoil followed the Congressional testimony of Federal Reserve chairman Ben Bernanke, as well as the release of the minutes of the last Fed policy meeting.

 

The overall theme: The market, full of overconfident and increasingly complacent investors, is fully addicted to the cheap money coming from the Fed and other global central banks.


It's like everyone is high on the financial heroin of monetary policy stimulus, and as long as they're assured of the next hit, everything else is ignored. Like the fact the macroeconomic data has rolled over again (datastream). Or that CEOs are marking down second quarter earnings at a pace not seen since 2001.

 

Today, that addiction was first bolstered before being crudely threatened. Any hint of a withdrawal of quantitative easing is met with immediate and panicked selling. If stocks are going to keep rising, the stimulus can never stop.

 

It's not enough that short-term interest rates have been at 0% since 2008. It's not enough that the Fed has taken the monetary base from $700 billion before the recession to more than $3.1 trillion now as it pumps $85 billion a month into the bond market. Or that the European Central Bank has promised to effectively monetize Spanish and Italian debt if needed. Or that the Bank of Japan is promising to double its monetary base over the next two years, destroying its currency in the process.

 

 

Investors are so focused on stimulus that any hint of tapering or a normalization immediately rattles confidence, sends markets into turmoil, and damages the still fragile economy. Over the last two weeks, Fed officials have ever-so-gently tried to drop hints it's looking at ways to slow its purchases. Then the economic data stalled, and it switched gears to saying it could increase or decrease the pace of purchases if needed.

 

Ben Bernanke reinforced the notion that the Fed is paranoid about doing anything that would rattle confidence in testimony today, noting that a premature policy tightening could stall the recovery. Stocks soared, ignoring anecdotal evidence that cheap money is losing its effectiveness on the real economy and corporate earnings growth.

 

Federal Reserve Building copyright Hisham Ibrahim, CorbisBut then, the bad news came. Bernanke walked back some of his aggressiveness. He noted tapering could start over the next few months (gasp!). He said he favors moving away from supporting the mortgage market directly (outrageous!). And he reminded Congress that while the Fed is subsidizing Washington's never-ending budget deficits, it needed to "take a longer view" and consider that higher interest rates are in the future (sacrilege!).

 

When the meeting minutes from the May 1 Fed meeting hit the wires, things got really interesting.

 

The minutes indicated a number of members were open to a reduction in bond purchases at the June meeting (that soon?!), while one wanted to start pulling back immediately (who's the traitor?).

 

Here's the kicker: For the first time in four years, the Fed is starting to worry about bubbles in the financial markets (they've found us out!). Specifically, a few members expressed concern that conditions in certain areas of the market were becoming too buoyant. One cautioned resulting imbalances could be difficult for regulators to identify and address (ahem, housing bubble anyone?).

 

The first step to fighting addiction is identifying and admitting the problem exists. That happened today in the stock market. And it wasn't pretty. Because if the market is going to reconnect with the fundamentals, and the fact that there is a limit to how many Treasury and mortgage bonds the Fed can buy, it has a long way to fall.

 

Over the last few weeks, I've been using a balanced, short-term approach to capture quick long side profits and downside protection. Long side examples include the recent breakouts in the Direxion 3x Natural Gas (GASL) and Nokia (NOK), which I've since recommended taking profits in.

 

 

Now, I see short-side opportunities in the mortgage REITs and European financial stocks. Examples include Annaly Capital (NLY) and Banco Bilbao (BBVA). I'm also shorting the euro via the ProShares UltraShort Euro (EUO).

 

Today, I'm adding two technology shorts to my Edge Letter Sample Portfolio: Facebook (FB) and Blackberry (BBRY).

 


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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122Comments
May 22, 2013 5:00PM
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If the Fed Reserve and the Fed Gov had just stayed out of the mess to begin with, we wouldn't have had the housing bubble and subsequent crash.  Then, if they'd stayed out again and let the free market work, we'd be full steam into an actual sustainable recovery by now.  Instead, we're bogged down in the mud, and we'll be stuck here for at least another decade.  More action by the federal gov and the Fed are making things worse, not better.

No one is suggesting Bernanke should raise interest rates to 7%.  The problem is that interest rates should never have been so crazy-low to begin with.  While it caused the housing boom, a temporary situation, this left the Fed with too little room to maneuver.   When push came to shove, they had no more bullets left, so they had to resort to massive expansion of the monetary base.

May 22, 2013 4:53PM
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Do the terms "Ponzi Scheme" or "Counterfeit" ring a bell?
May 22, 2013 4:51PM
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Here's what I find very troublesome.  It's uncanny to give one person like Bernanke so much power like that.  I mean the cronies closest to him can profit from insider trading like you wouldn't believe.  It's pretty evident to me that the way this game is played, the insiders (i.e. those closest to Bernanke and his policy makers) do all their trading before the rest of the public catches on.  So, every time something like this comes up, the cronies have walked off with money.


That tells me the markets are very RIGGED.

 

Not only that, I once heard from someone who said that prior to financial armageddon, the securities market will have an enormous run-up.  At the time, a few years ago when I heard this, I wrote this guy off as a crack-pot.  Unfortunately his statements are eerily prophetic.

May 22, 2013 5:37PM
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It's time for the Fed to pull the plug on QE and let the chips fall where they need to.....without doing it this Country will never have free market or capitalism again.
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"It's like everyone is high on the financial heroin of monetary policy stimulus, and as long as they're assured of the next hit, everything else is ignored."

 

Anthony is right on this. Big money will continue to make big money. Why would Ben stop? If and when the market is about to pop, once again big money will be the first to know, and they'll save their skin. Not the little guy.

May 22, 2013 4:45PM
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I know how it will end. When obama is gone.
May 22, 2013 6:57PM
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The state of the U.S. financial markets make me sad.  You see, I always believed that our market was a free, open market.  One controlled by sound principals and fundamentals.  A market that was open and honest, and dare I say trustworthy.  

What I have witnessed over the past several years make me very sad.  What I see is a central bank as a sort of puppet master to the entire financial markets.  Our Federal Reserve is influencing our markets to such an extent that there no longer is a free and open market.  One where supply and demand drive prices.  A market where underlying fundamentals dictate the pace.  One where success or failure is defined by profits/losses.   Rather, what we have is a speculators market addicted to easy money.  There is no organic growth in this market.  There is no top line growth in revenues. Nothing but buy backs and dividend increases, all of which are due to near zero percent interest rates.  By no measure is this market cheap.  Based on current underlying fundamentals, the price to earnings multiple should by contracting, and not expanding,  as all of the pundits would have you believe.  Why in the world should there be a multiple expansion with near recessionary levels of growth.  Again, the top line is anemic.  There is very little growth in our economy, and yet our markets are at all time historic highs.  And yet he media would have you believe that now is the time to buy.  Really? 

 And so I have to ask myself why the Federal Reserve is the singular voice of the entire market.  And the only answer I have is a very sad one.  This market I once regarded as a free and open market has become a market controlled by the Federal Reserve.  Why in the world would anyone want to invest in an oligarchy.  One where there is no fundamental thesis for price discovery and true value.  The whole thing is a sham.  One giant ponzi scheme.  So very sad.

Our market is not a free and open market.  
May 22, 2013 5:51PM
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Bernanke is actually worse than Madoff and should be jailed along with Gietner, Paulson, and many, many others. The only difference is Madoff ran out of patsies and their fresh money and that ended his scheme; Bernanke has all 310 million Americans as his patsies and uses our money and the printing presses of the US government to keep his scheme going.

 

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Odds are the US economy will not survive 2013 and if it does 2015 is the longest the US economy can go without a complete collapse.

 

Basically Bernanke is saying the eocnomy is too weak to take away QE3 yet we have P/E ratios of like 20/1 even 30/1 in most stocks when the normal is about 10/1 in sane economic times and 5/1 ratios are clear buying points.

 

As these are still depression level economic times stocks should be at 5/1 ratios this means the stock market is over priced by a factor of 4 to 6 times. Look for the DOW to be about 4,000 to 2,500 when the dust clears.

 

Japan's economy has totally collapsed and by end of this year it will have an economy less than India's.

 

Pretty much Euro is going to collapse sooner rather than later.

 

As to the US we ahve already collapsed yet like a giant we are going to take a long time to die this is like the 6th year and we have at most 2 more years left.

May 22, 2013 6:07PM
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The market is a drug addict and the Fed is the dealer
May 22, 2013 5:06PM
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What’s obvious from today’s market moves is that there isn’t a single thing anyone else but the Fed can say, think, or do that will have a significant impact on your investments, up or down. Whatever you or your pension fund manager are paying for the pinstriped suit your stock broker or investment advisor is wearing, it’s at least 1,000 times too much.

 

May 22, 2013 6:02PM
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Look, we are on our way to 20 trillion in debt.  20 Trillion at 5% is one trillion in interest.  That is a mere 2 points higher than the 30 year rate.  

Our budget is 3.8 trillion.  Imagine another trillion on top of that.  We have record tax revenue at 2.8 trillion.  If the FED were to stop the presses, the debt spiral would increase on an annual basis to 2 trillion a year.   In the next decade we will double the debt to 40 trillion.

The MUST print or risk the collapse of the financial system.  The only other solution is balancing the budget with either massive tax increases (including getting the 47% to pay their fair share) or massive spending cuts.

Any wonder people are buying guns and ammo?
May 22, 2013 5:29PM
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Come on JG. I suppose you want to mint a couple of Krazy Eyes Krugmans Trillion dollar coins. Lets just mint a whole bunch and give them out to all the struggling countries - duckies and bunnies and rainbows and butterflies, yay!!  You liberals have no sense of economics because you have all been on the Dole so long your brains are soft. Wealth can't be printed into existence... (Germany after WWI is an easy example) You can not argue with those who know so much that is not true. Unfortunately, liberal ilk have controlled the Higher Education System so long that it has infested our Government to the point of no return. The current IRS scandal is a prime example. Nothing is free, get over it.   
May 22, 2013 5:04PM
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Gotta end it COLD TURKEY!!!

 

  Every day Ben and the boys pump another few billion into the money supply ( I should really say into the market because that's where it all goes, they don't lend except on margin to other investors) is about 3 months of brutal crushing double digit inflation.

 

So liquidate those stocks, bury your money in the backyard, and buy T-BILLS yeilding 12% in about 3 years.

May 22, 2013 6:47PM
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I think they need to STOP the printing press so we can get to some normalcy.  You CANNOT sustain this economy.  We need jobs, produce something.  DC is full of crazies.  I know it is not going to be pretty, but we have to start from somewhere, we keep this up and it will be like the scifi movies you see.
May 22, 2013 5:59PM
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Depriving Ma and Pa, pension fund and a few rich  from buying bonds may force them to move to equity.  But how does creating a market bubble help the unemployed and the economy ?   
May 22, 2013 5:17PM
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Ben,Where the hell is this directly helping the real economy with all this Monopoly money.Before the next meeting go to the drugstore and  get some smelling salts and lift that cloud in your brain.Does Rogaine come in ECONOMY size?
May 22, 2013 7:46PM
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"Ben Bernanke reinforced the notion that the Fed is paranoid about doing anything that would rattle confidence in testimony today, noting that a premature policy tightening could stall the recovery"

 

That's just it: there hasn't BEEN a recovery! The meddling from the Fed and the government hasn't produced the effects they stated would occur. At some point, they're going to have to stop and just let the system work itself out. How bad that period may be, no one knows. But it has to be better than watching the dollar become worthless due to all the printing.

May 22, 2013 6:58PM
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Danger Will Robinson, Danger!!!!

 

If Ben would shut his mouth and just shut off the presses, quietly - who would notice and when or if ever? If Fed and the Treasury just started pulling $1 out of $5 of the replacement money without saying they are doing so, would we miss it? Only if we were told.

 

I remember as a kid that if the market moved 10 or 20 points that was an earth shaking day. Now it has to move a 100 points to get attention. The market is going to fall - there is no doubt - there is no solid foundation to support such upticks. Just waiting for something to cause the stampede for the exit doors!!!

 

Think Zimbabwe folks! where a wheel barrow of cash cant buy a load of bread. Look at the cost of crude the last month or so, what justification is there? Look at the pump cost- are there that many people working now to shorten the supply? Look at your food costs what does $100 buy at the store? This is the reality of inflation that we don't have (ya right). I am suggesting that those who do not know how to grow a garden learn very soon. Even the packet of seeds have finally fallen prey to inflation - first cut the amount in the packet (2 years ago) then double the retail price (last year) this year just not allot of choice or selection.

 

The hard times that are coming will be a challenge even for those are prepared. I hope our country will survive the results so our great grand children will have a place on this earth to call home of the free.

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