By Gary Kaltbaum-September 5, 2016
For the past 7 weeks, major indices have sat tight. In fact, hardly moving more than a couple percent. But underneath the surface, there has been good action as small and mid-caps have now come to the fore. The worst areas have been defensive areas like utilities, reits and the like. On top of that, financials have actually caught a relative bid. There is nothing wrong with that. So to be brief, as long as the major indices hold above support/moving averages (the Dow just held the all-important 50 day), there is not much to complain about. (Fundamentals are another story!) This is also occurring in the dreaded summer months. So as we get closer to the election, all is swell? That said, central bank shenanigans have only become more maniacal. Going more negative with rates, 0% rates, $20 trillion and counting of printed money, over $2.5 trillion continue to be printed each year, the buying up of equities and bonds and who knows what else. We felt it necessary to bring this up again because unfortunately, the bubble continues…and unfortunately, we know by precedent what happens at the end of bubbles. But this time, we are in the midst of the easiest monetary policy in history, by far, by oodles, by trillions, by an amount unimaginable, unfathomable and every other word you want to use. We do not know WHEN it ends or WHERE it ends from but we know that it will end. So as we head into another supposed rate hike, we wanted to repeat a report we sent to you a while back. We took out some of the market talk at that time and added a few things from the present.
(July, 2005) “We’ve never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think it’s gonna drive the economy too far from its full employment path, though.”
(March 28, 2007) “At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained. In particular, mortgages to prime borrowers and fixed-rate mortgages to all classes of borrowers continue to perform well, with low rates of delinquency.”
(May 17, 2007) “All that said, given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system. The vast majority of mortgages, including even subprime mortgages, continue to perform well. Past gains in house prices have left most homeowners with significant amounts of home equity, and growth in jobs and incomes should help keep the financial obligations of most households manageable.”
(January 10, 2008) “The Federal Reserve is not currently forecasting a recession.”
These were not Ben Bernanke’s only quotes. For almost two years, this man said markets were fine, economy was fine, housing was fine, subprime was fine. In other words, the man who had control of the financial system did not have a clue what was sitting right in front of him. The man who enabled it, watched it, oversaw it, had no idea about it, who should have been fired immediately for it…not only kept his job but was looked to to come up with the solution when everything crashed. What was the solution? Take exactly what he did to enable the housing bubble and crash…and hulk it up. Not only did Mr. Bubble go easy, but he embarked on a policy that even the biggest of monetary doves could not fathom. 0% interest rates started. Savers were screwed. There were no more riskless income investments. Savers who were used to getting a few percent on their money markets now got the middle finger. And to where did this interest accrue? Yes…the same people that were a huge part of the cause of the problem, namely the big banks and the lenders. Yes, Mr. Bubble gave a Christmas, Hannukah, Easter, Groundhog and every other holiday gift to these people by taking it away from the saver. But Mr. Bubble said not to worry because the savers would make it up in a better economy.
But Big Ben had more things up his sleeves. Little did we know. This leads us to this other Bernanke quote. Look at the date!:
(November 21, 2002) “The U.S. government has a technology, called a printing press (or today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at no cost.”
And away we went. Big Ben started QE1 (Quantitative easing). He did not dare call it money printing. To be clear, we were against it from the start. We did not like anyone interfering with markets the way he was about to embark. After all, they don’t call it Ponzi for nothing. But something happened. There was supposed to be a time limit on the printing. Remember the escape plan? QE1 came to a close. When that occurred, markets dropped over 10% and quickly. But don’t worry. Big Ben just started QE2 to fix things up. But when QE2 ended in 2011, markets dropped about 15% in just over a month. But the mad scientist was not done. He embarked on something called Operation Twist (we still don’t know what the hell that was) and then the mother of all money printing in QE3. It was basically unlimited and almost everlasting. To the tune of over a gargantuan $1 trillion/year, $85 billion/month (hey,it’s just conjured up money), Ben printed away. And just like the first few times, markets loved it. In fact, Big Ben no longer hid the fact he thought higher markets (rigged and manipulated or not) were a good thing. In speeches, he stated by keeping interest rates low, people would have no choice but to enter markets. This would cause markets to go up…making people feel wealthy. People feeling more wealthy would lead to more spending. More spending would lead to more hiring. More hiring would lead to a glorious economy…and all will be well.What could go wrong? Unfortunately, a lot. As we have stated, when all is said and done, at the end of the road, markets that have been rigged and manipulated with massive amounts of conjured up bucks, which enabled speculation and greed beyond recognition, WILL ALWAYS EVENTUALLY REVERT BACK TO THE MEAN! We just don’t know from what point. But in the meantime, it has been our contention that every data point, every asset price, every economic statistic (fake or real), real estate, stocks, bonds, corporates, municipals, art, beany babies…you name it have been working off of rigged and manipulated interest rates which caused the speculation…which causes more speculation…which causes more greed…which causes more leverage…which causes more debt…which causes ridiculous price and yield on all kinds of bonds, especially the riskiest…which causes 500 square foot shacks in San Francisco to cost $1,000,000…which causes 200 Biotechs with NO SALES to be able to come public…which causes companies that would come up with an app with no sales to get billions of dollars in market cap in the private equity market…which causes the massive margin (all-time record) ..which causes everyone to feel comfy…which causes everyone to think nothing could ever go wrong…which causes certain strategists to give out outrageous predictions on the markets…because as we have titled many times…NOTHING IS EVER WRONG UNTIL MARKETS SAY SO!
We would actually give Janet Yellen some credit for the Fed ending QE3 , but she was a party to all of it in the beginning. This end of QE3 led to that October’s market break. We saw and wrote about the topping process in the weeks leading to the drop but then the lemmings showed up. In a concerted effort, as QE3 ended, Europe and Japan ramped up their own massive QE and China announced its own easing…stanching the bleeding in markets and turning them back up.
This brings us to the present! It has been no surprise to us that the Fed has raised only once in the 22 months since the Fed stopped the printing press. We have told you forever that they would never raise rates unless markets forced them to. We cannot believe how many pundits continue to announce that a rate hike is just around the corner. Since we are big believers the Fed is targeting the markets, we continue to expect their next move to be another round of QE. We even heard rumblings about negative rates recently. But there looked to be a problem recently. In the past, all dovish yapping and all dovish moves had led to just another ramp to the upside. Wall Street had been used to the Fed having its back. But the big money was not listening any more. The game could have been up. The big money knows the world is massively debt laden. The big money knows economic growth (as good or bad as it is) is based on rigged and manipulated policy. The big money knows valuations are up there. The big money was voting with both hands and not just here but around the globe. We have told you for years that we didn’t know when but eventually markets will get to a point where they actually shoot a certain finger back at the Fed…and that looked to be happening…until February. What happened starting in February? Japan announced a trillion…Europe announced a trillion, UK lowered, China lowered, all bought up markets and we are not just talking bond markets. And another bottom was in. As we stated, depending on what abacus you are using, the world is currently printing over $2.5 TRILLION…that’s TRILLION each year. The world has now more than $15 trillion of negative rates. Many are just buying up their markets giving a bid underneath. What more do we need to say? We are seeing some outcomes that are less than thrilling.
There are no riskless income investments as savers are screwed and screwed big timed. In order to get yield, they must delve in places that are less than stellar. Junk bond funds anyone?
Insurance companies are now surprising policy holders with major premium hikes as insurance companies are being whacked because of low rates.
Pension funds, in no way, shape or form can continue to promise outsized returns.
Corporate debt is skyrocketing and for the purpose of buying back stock and higher dividends. Since they cannot grow, they must engineer.
Price and yield are distorted and we mean distorted. Yields on bonds we bought 5 years ago at 5% are now comparatively at 1.5% and lower.
All this leads us to ask the question…how the heck are they ever going to roll this back? The answer is THEY CAN’T!
No matter what, we will pay attention to the markets first but we remain worried that people who have always been wrong about things, continue to have to be “data dependant” before making their moves. Weren’t they supposed to be the smartest people in the room? With leverage and debt in the system much larger now than in 08 (enabled again by the Fed), we’d be paying very close attention! Is it any wonder Buffett, Summers,the IMF and many others have been pleading not to raise rates even 1/4% to a measly 1/2%?