Why the stimulus can never stop
The market's cheap money addiction is laid bare. No one knows how it will end.
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.
But 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).
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.
MSN Money on Twitter and Facebook
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.
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.
"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.
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.
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.
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.
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.
"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.
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.
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
The Detroit automaker recalled 1.6 million vehicles last month -- several years after a deadly problem was discovered.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.