Listen to Doug talk about the short-term and long-term trends, divergences between the U.S. markets and international markets, AAPL news, the Federal Reserve meeting and policy, European debt crisis, and volatility in the markets.
This week’s video covers a lot of ground, so watch it and remember to keep a close eye on the market for better buying opportunities later this year.
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Things are changing in the market. The concerns that we’ve had all year about the strength of the global economy are coming to fruition, especially in Europe.
Spain, Italy and Portugal are undergoing tough budget cuts, and this is causing some real pain in those economies. Spain, for example, has about 23% unemployment, and as much as 40% unemployment in young people – a circumstance which will likely lead to some significant civil unrest. Spain is the 12th largest economy in the world, and we believe that it will be the “new Greece” – a serious problem for investors to keep their eyes on.
The Federal Reserve meeting minutes this week revealed that QE3 is not coming in the near future, even though we expect a program of some kind to roll out soon. Obviously, we noticed a reaction in the market to this news. As always, pay attention to the risk factor and have an exit strategy for your capital.
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The markets are up, and they continue to be flooded with “easy money”, which is solving some of the Eurozone’s short-term debt problems. Here in the U.S., we’re also still seeing very low interest rates, thanks to the Federal Reserve. We read some opinion pieces today, saying that 80% of stock market rally relates to “easy money” policies by Ben Bernanke and the Fed.
Here’s a few of the articles we read this week about these “easy money” strategies:
The largest asset pool that we have clients in here at Fabian Wealth Strategies is bonds, and we think that this will continue to be a safe harbor for investors, as we wait to see what happens with the European crisis and global slowdown. Remember, be careful out there, as we believe that these are risky markets and wise investors should focus on capital preservation right now.
We read a lot of news here at Fabian Wealth Strategies, and occasionally we like to link up to the topics we’re reading and give our readers a chance to see the weekly news that we think is important.
As a reminder, our take on the markets is somewhat pessimistic and “bear-ish”. We think that opportunities for growth will come soon, but that opportunities for heavy losses are currently the most likely in this volatile market. Capital preservation is currently our priority for our clients.
Here’s some of the stories that are informing our point of view:
To hear Doug’s commentary on this week’s news in detail, listen to the podcast here. Also, check back tomorrow for an update on international news and how it effects your investments.
In a word, no; we don’t believe so. To use a cliche, the proverbial can has been kicked down the road, and pain from the European debt crisis is far from over.
Some people are tempted to liken the debt crisis in Europe to our own struggles a few years ago here in the United States. However, there are three important variables to remember when contrasting the European debt crisis of today and the U.S. fiscal crisis in 2009.
The U.S. implemented TARP, (basically, a way for banking institutions to borrow from the Federal Reserve)
The U.S. created the Stimulus package
The U.S. has had little to no austerity measures (in fact, there was the opposite, with expansive unemployment benefits provided)
In contrast, the Europeans are requiring austerity and struggling through very high unemployment and cut pensions, plus much higher taxes. Add to that the very high cost of energy and basic living costs in Europe, and we feel this is bound to be a slow recovery, if a recovery at all.
We mentioned the triple threat to your financial portfolio last week, and we encourage our readers and listeners to not get caught up in the idea of “lost opportunity” during these first few months of 2012. We are still convinced of the risks that weak fundamentals and global economic contraction pose on our investment capital, and we encourage you to be cautious when investing.
This is a podcast summary. For complete details on the items discussed today, please listen to the full audio here.
Stocks appear to be topping, and may have already peaked. There was a relief rally last week which we believe had much to do with the appearance of everything being OK (activity from the Federal Reserve, the controlled default in Greece, etc.), and not with the fundamentals.
One reason for continued investor confidence is that Apple Computer (AAPL) stock has been soaring. Also, American investors especially seem to be excited that it appears that America is decoupling from the rest of the world and they hope this means that we won’t be as affected by adverse global trends. However, we still believe that there is reason to be concerned, because of what we’re calling the triple threat.
The triple threat is:
Europe is in recession
China’s economy is slowing down
U.S. profit growth prospects are slowing as well
Also, equities are going up, along with oil and bonds going up as well, so this is a very unusual circumstance. Bonds rising in value are usually associated with depression and deflation, but the stock market is soaring. Something strange is happening here, and John Hussman wrote last week that is a bad time to invest too heavily, based on historical similarities, and we agree. We encourage all of our readers to check out his piece on the market trends, here.
This is a podcast summary. For complete details on the items discussed today, please listen to the full audio here.
Thanks for reading our podcast summary. If you want more details on what is discussed on the blog, please listen to the full podcast here.
A suspect power rally in the financial markets
Stocks vs. Bonds: The bond market is being artificially manipulated by the Federal Reserve, as they sell short-term bonds and buy long-term bonds. Rates on CDs are ridiculously low, and is forcing people to make other financial decisions, which often ends badly. When people think they need to be getting a return on their investment at all times, they often move their money from a safe place into a risky one. It’s a good idea to be educated about your investment options, but remember that we are advising low-risk investments right now. Don’t be too eager to move your money in such turbulent times.
The stock market rallied this week, but we are still suspicious of this change, because, as you all remember from 2008, we have seen these kinds of bubbles before. We think that the problems in Europe will seriously effect the stock market (check back on the blog tomorrow for more details on the European crisis). For this reason we advise keeping a high volume of cash in your portfolio.
Despite a good jobs report this week here in the U.S., the situation in Europe has not changed for the better. We predict that economic growth will slow in response to these fiscal problems in the rest of the world, particularly in Europe. It’s crucial to understand the risks and continue to face these problems with a defensive posture.
For more information on the economic situation in Europe, please listen to the podcast and check back tomorrow for more info on the blog.
Now that the Federal Reserve has committed to keeping interest rates at rock-bottom levels well into 2013, many pundits have been saying that the central bank is essentially out of bullets when it comes to giving the economy a shot. And while there might not be another bond buying plan like the QE2 stimulus in our immediate future, the Fed’s fiscal firepower is far from empty. In fact there are many things the Fed can still do to stave off any kind of deflationary developments, and to combat any drift toward a depression-like scenario.
So, what are some of the things the Fed can still do to combat deflation? Well, for one thing, it can introduce more inflation into the system. How can it do that? Well, here are just a few of the bullets left in the central bank’s arsenal.
1) Purchase of U.S. private debt securities. Although the Fed does not have authority to purchase private securities directly, it could work with banks to make this happen. It would do so by offering guaranteed fixed rate 0% financing for banks for the duration of the securities purchased.
2) Purchase of foreign debt securities. Given the troubled debt situation in Europe, the Fed could inject more money into the system by essentially buying it from elsewhere. In fact, the quantity of foreign assets eligible for purchase by the Fed is several times the stock of U.S. government debt.
3) Purchase of equities on domestic and/or foreign stock markets. The Fed could essentially prop up the value of stocks by becoming a big buyer of domestic and foreign equities.
4) Devaluation of U.S. Dollar. The Fed can intervene in currency markets by purchasing and hoarding foreign currencies with newly minted U.S. dollars. This would stimulate inflation, but it also would stave off deflation.
5) Accommodation of fiscal deficits. This is essentially Fed-enabled deficit spending in the form of direct spending via government. This is what economist Milton Friedman famously called a “helicopter drop” of money into an economy.
I think the Fed is going to institute some kind of plan to stave off deflation and a recession, as they realize that recession is about the worst thing that can happen for financial markets and for the economy right now. In exchange for staving off recession, the Fed is willing to pay the inflationary price.
This could be good for assets like gold, and even the stock market. And while it may be bad for consumers, the Fed sees the deflation/recession/depression scenario as much more pernicious outcome for the entire global economy.
The action in the equity and bond markets so far in 2011 can be characterized by what I call a sort of “nervous uncertainty.” Let’s face it, we’ve had a lot of cause for worry, and we’ve had a lot of reasons to be encouraged. On the bond front, that nervous uncertainty has translated into a big surge in cash holdings among bond mutual funds. Apparently, bond fund managers aren’t in any hurry to purchase new debt, and that comes despite the fact that bond fund inflows are on the rise.
According to mutual fund research firm Morningstar, the average cash stake in the 1,623 funds that the company tracks rose to 9.8% at the end of June from 9.1% at the end of 2010. In dollar terms, that’s about $243 billion. The average bond fund’s cash position was at 10.2% at the end of 2007, and 10.1% at the end of 2008, according to the data.
Meanwhile, investors have been funneling money into bond funds in 2011, adding some $92.8 billion through June 30. That’s the biggest inflow seen in any of the fund categories that Morningstar tracks. In other words, bond fund managers are raking in the cash, and essentially hoarding it.
So, the logical question here is why aren’t bond fund managers investing in new debt right now?
Well, for starters, we can blame that debt-ceiling debate for at least some of the uncertainty. Although I am not sure how to quantify this, I suspect that no bond fund manager wants to get caught with his guard down if the unthinkable does happen, and if the powers that be in Washington drive the nation into default.
Another reason why bond fund managers aren’t gobbling up new debt is the possibility of a credit rating downgrade. Such a downgrade has been threatened by both Moody’s and Standard & Poor’s. Although I suspect that we are in no danger of a downgrade here, the mere discussion of such a negative turn of events for the bond market is understandably spooking bond fund managers.
Then there’s the issue of the Federal Reserve’s follow-up policy to quantitative easing, part 2, or QE2. Will we see another round of money creation in some form or another and, if so, what will be the impact on the U.S. dollar and U.S. Treasury bonds? Nobody knows for certain, and this uncertainty is keeping cash on bond fund books.
As much as I hate to tell you this, I think at this point Congress is going to have to approve this $700 billion dollar bailout proposal lest we face a virtual crash in our financial markets.
All of this talk about the next “Great Depression,” if we don’t act right now, likely will have a self-fulfilling prophecy effect if, in fact, Congress doesn’t act now to approve the plan to assume all that bad mortgage — and possibly other — debt.
What this effectively means is that Congress has a gun to its head — put there by Treasury Secretary Paulson, Federal Reserve Chairman Ben Bernanke and the rest of the banking system elites who — along with the politicos — were essentially responsible for getting us into this mess in the first place.
There is no way that in an election year, politicians are going to risk the accusation of inaction and/or aiding and abetting a financial collapse, so they will no doubt act hastily and try to ram through bad legislation aimed at putting the reins on the beleaguered financial industry.
I’ll have more on the root causes of this issue in the weeks ahead, but it’s suffice to say that when it’s all said and done, the economy and Wall Street will be changed permanently, and not, in my opinion, changed for the better.
As I’ve been saying virtually all year long, the safest place to be in these trying times has been in bonds and cash. If you’d like to find out how you can protect your wealth during this time of unprecedented financial turmoil, click here.
