Stay Away From This Gambler’s Market

We expected the summer trading to drag on…and then the markets to set off on their new trends after 1 September: Stocks down. Bonds down. Gold up.

Looks like they’ve decided to steal a march on investors. Last week, stocks and bonds fell hard. Gold up.

The New York Times reports:

‘The stock market was pummeled on Thursday after two big companies issued grim sales forecasts and economic data added to investors’ concerns that the Federal Reserve would soon start winding down its economic stimulus program.

‘The Dow Jones industrial average fell more than 225 points, its worst day in nearly two months. Investors also sold off bonds, driving the yield on the 10- year Treasury note to its highest level in more than two years.

‘Before the start of trading, Wal-Mart Stores cut its estimates for annual revenue and profit, warning that cautious shoppers are spending less. The news followed a disappointing revenue forecast from Cisco Systems late on Wednesday.

‘In a twist, more signs of resilience in the nation’s economy weighed on the stock market. Reports on inflation and the job market appeared to raise the odds that the Fed would begin winding down its $85 billion monthly program of buying Treasury and mortgage-backed securities as early as next month. Many investors think that the Fed’s effort to keep interest rates extremely low has underpinned the stock market’s record run.’

Stocks are now as expensive as they were in 2007, says our old friend Mark Hulbert.

As for bonds, they are at the top of a 30-year bull market.

And gold? The metal bottomed out in 1998. It’s gone up ever since, with a textbook correction over the last year or so.

What’s happening now? Slowly, gradually, like draining a huge lock on a canal, the bond market is dropping. Bonds rise on trust. They fall when trust ebbs away.

Why should trust fall now? The simple answer is because it has run its course.

Trust is cyclical. As it grows, people become more confident, more sure, and more reckless. Why hold back when there is nothing to fear?

When trust is low, they are reluctant to lend to anyone. The marginal borrower can go fish. When it is high, they give him all the money he wants and throw in a toaster oven.

But as debt rises, the income streams that support the debt becomes, relatively, smaller. Or, to put it another way, trust is naturally self-limiting. It reaches its peak at the exact moment that the system becomes most untrustworthy.

This prompts the inevitable correction. Which is what began in 2007, with the collapse of the subprime sector.

But you know all this, don’t you?

And for the last five years, the feds have been trying to keep the lock open – quadrupling the monetary base, adding $5 trillion to the national debt, twisting every price and trifling with every number, and putting more and more of the nation’s real wealth in the pockets of the rich. In other words, the feds have been making the system even more untrustworthy!

Behind the sell-off was, apparently, fear that they would stop fighting it. The economic news is positive, we’re told. The Fed will soon begin to ‘taper off’. We doubt that will happen.

First, as the report from Wal-Mart shows, the ‘recovery’ has yet to make a reliable appearance. Household income is weak. And without more income, consumers can’t consume.

Second, this is not the first time we’ve seen what happens when rumours of ‘tapering off’ are heard. Investors panic. They understand that quantitative easing (QE) and zero interest rate policy (ZIRP) are responsible for current prices of stocks and bonds. They know, too, that if the Fed backs off, lower prices will be guaranteed.

The last time the markets sold off on ‘tapering off’ rumours, the Fed quickly reassured investors that it had no intention of backing away anytime soon. It will do so again…and again.

In a panic, the feds might even intervene much more aggressively to keep stocks and bonds from falling. And who knows? They might even be able to pull off a pyrrhic victory…sending stocks into the stratosphere…where they get blown to bits!

But that will be a gambler’s market. Not our kind of market. Whether the feds like it or not, the trust that keeps stocks and bonds high is flooding out the drains. Now, it is just a matter of time until the whole kit and caboodle sinks.


Bill Bonner
for Markets and Money  

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From the Archives…

Foreigners Turning on the US
16-08-2013 – Greg Canavan

Silver, The Devil’s Metal
15-08-2013 – Greg Canavan

Detroit, Demographics and Detonation
14-08-2013 – Vern Gowdie

Why Gold Has an Interesting Tale to Tell
13-08-2013 – Bill Bonner

China’s Economy… Stabilising, Bottoming, Rebounding
12-08-2013 – Greg Canavan

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.

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