I often find myself thinking we are living in the golden age of American idiocy.
With the advent of social media, we are exposed to discourse that is often best left unsaid, from actresses discussing their colonic purges to sports talk hosts engaging in tasteless rants on Twitter.
But the idiocy is not confined to social media and is especially rampant in the investment world.
What we saw this week is the perfect proof…
U.S. Financial Media is Reckless and Misinformed
Last week, as the Nasdaq Composite Index broke through the 5,000 level for the first time since the Internet Bubble and the ECB prepared to launch another round of misguided bond buying, idiots everywhere came out of the woodwork in droves.
The most obvious place for investment idiots to come and hawk their wares is always CNBC.
Last week, they did not disappoint. On March 4, two days after the Nasdaq closed at over 5,000 for the first time in 15 years, CNBC ran a segment in which Bill Griffiths, Kelly Evans and Phil Lebeau interviewed Wall Street Journal columnist Jonathan Clements and Premier Financial Advisors' Mark Martiak.
In the interview, both Mr. Clements and Mr. Martiak stated (seriously) that it would be prudent for consumers to take out 7-year car loans and use the money to invest in the stock market while it is trading at all-time highs.
This may not rank as the most reckless and misinformed investment advice ever given on the business network, but it comes close. There are many reasons why CNBC's viewership is hovering at all-time lows, but one of the reasons is reports like these that increasing fills its airwaves.
Meanwhile, In Europe…
Events across the pond also inspired major idiocy to spring forth regarding what investors should do with their bond investments.
Last week, European Central Bank President Mario Draghi announced that European quantitative easing would begin on Monday. Talk of this plan had already sent interest rates in Europe to record low levels – in fact, at last count about $2.0 trillion of European sovereign debt carried negative yields.
Thinking it had found a brilliant trade, the Wall Street Journal wrote a "Credit Markets" column the day after Mr. Draghi's press conference touting the attractiveness of 10-year U.S. Treasuries by comparing their 2.11% yields to Germany's 0.338% 10-year yields.
The title of the article was "Treasurys Offer Bonus" – not a properly written "Treasuries Offer Bonus." So in addition to a lesson in finance idiocy – lending money to the U.S. government for 10 years at 2% is a guaranteed money-loser even if lending money to the German government for 10-years at 34 basis points is an even bigger money loser – the writer also offered a lesson in how to be illiterate!
If this is the quality of thought being offered by the leading financial newspaper in the world, we are in serious trouble.
The Fed Will Move in June, Investors Are Already Spooked
Of course, by the end of the week, a lot of investors probably felt like idiots after the markets sold off in the wake of a stronger than expected February jobs report that convinced them that the Fed will start raising rates in June. That would be a good thing, not a bad thing, so the reason for investors to dump their stocks is a 25 or 50 basis point hike in rates but the fact that stocks are overvalued, as I have written in this column repeatedly.
In February, nonfarm payrolls increased by 290,000, about 60,000 more than expected, and the unemployment rate dropped to 5.5% from 5.7%. These numbers are going to make it very difficult for the Fed to delay raising rates beyond June.
The first step in this process will likely be the removal of the key phrase that it will be "patient" about doing so in the statement it issues after its meeting on March 17-18. This will free it to raise the Federal Funds rate by 25 basis points at its June 16-17 meeting, which is long overdue.
The mere hint of any such interest rate increase spooks markets, however. So last week, the Dow Jones Industrial Average dropped 276 points or 1.5% to close below 18,000 at 17,856.78 while the S&P 500 lost 33 points or 1.6% to 2071.26, barely above the level at which it began the year (2058.20).
The Nasdaq, having briefly breached the 5,000 mark on Wednesday, lost 36 points or 0.7% on the week to close at 4927.37. But in inflation-adjusted terms, the Nasdaq is still far below its 2000 highs.
Where the Nasdaq Really Needs to Be
In order for it to return to its Internet Bubble high in inflation-adjusted terms, it would have to trade at 6900. That factoid is not only a reminder of how idiotic the financial press is in its reporting, but of how the value of money continues to be devalued by central bank policies.
Bonds fared even worse last week. The yield on the benchmark 10-year Treasury popped by 24 basis points to 2.24% from 2% a week ago. Just over a month ago, on January 30, it traded as low as 1.67%.
Those who bet on lower rates are getting crushed. The June Fed-funds futures contract jumped from a 70% probability of a June rate hike on Friday from a 48% probability just a day before according to the Chicago Mercantile Exchange. The markets are clearly expecting the Fed to act sooner rather than later.
The Dollar Is Still the Way to Go
But even with the big moves on Friday in stocks and the continuing sell off in bonds, the biggest story remains the dollar, which hit an 11-year high last week as the Fed moves closer to raising rates and other major central banks redouble their efforts to weaken their currencies (last week the Bank of China became the 20th central bank to cut rates this year).
The euro plunged below $1.10 for the first time since 2003 and appears headed to parity though the charts show that it could easily drop well below that – resistance shows up at $0.80.
While all eyes will remain on the stock market, investors should be paying closer attention to currency markets. The move in the dollar is going to continue as monetary policy in the U.S. continues to diverge from those in Europe, Japan and China.
The strong move in the dollar began last year as the Fed approached the end of QE3 in October. Now that it is moving to its first rate hike in 7 years while other major central banks are moving in the opposite direction, the move is entering its next phase.
The dollar is the most important single financial instrument in the world. It is seeing one of its biggest moves in years. It is going to rock the markets. Those who avoid it are going to feel like real idiots.
About the Author
Prominent money manager. Has built top-ranked credit and hedge funds, managed billions for institutional and high-net-worth clients. 29-year career.