T.S. Eliot must roll over in his grave every time some smart-alecky financial writer says that "April is the cruelest month."
Having to hear the anti-intellectual elite pretend to have read, never mind think they have the remotest understanding of those words or what follows in one of the most complex literary works of the 20th century is galling enough. But hearing that over-used phrase misused to excuse more underperformance and bad policy is flat-out nauseating.
April 2015 was only cruel to those who remain wedded to the idea that markets are rational, trends move in straight lines, and policy makers have the remotest clue of what they are doing.
For those who are more realistic about the nature of markets and the signals the economy has been sending for months, April should have been no problem at all to navigate….
Two Important Trends Took a Break
Unfortunately, a lot of investors were caught flat-footed at the end of the month after learning that first quarter GDP came in at a measly 0.2% annualized rate. Had they been paying attention to the Atlanta Fed, however, they would have been expecting that number (the Fed's forecast was off by a mere 0.1%). This number is still subject to two revisions, but it is unlikely to end telling a different story. Moreover, the Atlanta Fed's early numbers for the second quarter are pointing to only slightly stronger growth (under 1%), suggesting that the much ballyhooed recovery from lousy weather and the stronger dollar isn't materializing.
Until the last week of April, markets that were hitting one new record high after another started sputtering. Bad news started being just that…bad news. The S&P 500 still ended the month up 0.9%, but was only up 1.3% year-to-date (excluding dividends). The Dow Jones Industrial Average closed the month flat on the year while the Nasdaq Composite Index remained the star performer with a gain of 4.3% for the year. Markets rebounded on Friday but investors are definitely very nervous.
The big news in April was that the dollar rally and the oil crash both took time-outs. This should not have been a surprise, however – while investors should expect the dollar to remain strong, and oil prices under pressure for the rest of the year, markets do not move in a straight line. The dollar weakened due to a number of factors including the continuing stream of weak economic data that led observers to conclude that there is little chance that the Fed will raise rates in June and may not move in September.
My view has been that the Fed should have moved a long time ago to start normalizing rates.
It has long been apparent that low interest rates and successive bouts of QE have failed to stimulate economic growth. But instead of changing course in the face of evidence that their policies aren't working, the former tenured economics professors charged with saving the world are just doubling down on their mistakes. It is starting to look increasingly possible that before they have a chance to normalize rates, they are going to face a recession or some type of market accident that will force them to engage in another bout of QE since they will have left themselves without interest rates as a tool of monetary policy.
This pattern of policy ineptness is being repeated around the world as central bankers in Japan, Europe and China double, triple and quadruple-down on ineffective policies and bury the world in debt. The real mystery, however, is why anybody should be surprised that these policies are not working. In 2008, both Janet Yellen told Ben Bernanke said that they didn't believe that QE works. Here is an excerpt from the FOMC Minutes from December 2008 quoting Janet Yellen speaking to Ben Bernanke:
"As Japan found during its quantitative easing program, increasing the size of the monetary base above levels needed to provide ample liquidity to the banking system had no discernible economic effects aside from those communicating the Bank of Japan's commitment to the zero interest rate policy. I think my view on this mirror those that you expressed in your opening comments, Mr. Chairman."
Bernanke Continued to Tarnish His Legacy
Indeed, in his new blog, which Mr. Bernanke may not realize has quickly become a tool with which he is digging a deeper hole in which to bury his increasingly dubious legacy, he confirms that the monetary policies being pursued are not solving the problems they need to solve: "I agree that monetary policy is no panacea, and as Fed chairman I frequently said so. With short-term interest rates pinned near zero, monetary policy is not as powerful or as predictable as at other times. But the right inference is not that we should stop using monetary policy, but rather that we should bring to bear other policy tools as well."
Mr. Bernanke is wrong in stating that we should continue employing policies that aren't working. And the reason he is wrong is that it isn't simply that they aren't working – they are actually causing serious harm. They are facilitating massive misallocations of capital in the stock and bond markets that are resulting in bubbles in certain sectors (i.e. social media and biotech stocks, government and investment grade bonds) that will sooner or later pop and cause massive losses. Rather than act as the enabler of fiscal policy makers who don't have the guts to step up and implement meaningful pro-growth policies, the Fed and other central bankers should stop pouring gasoline on the fire they have set.
Social Media Darlings Were Dealt Some Market Reality
Last week, some of those fires started to burn investors. Three social media darlings – Twitter Inc (NYSE: TWTR), LinkedIn Corp (NYSE: LNKD) and Yelp Inc (NYSE: YELP) each lost about 20% of their value after disappointing investors. But even after these losses, each of these stocks is still trading at ridiculous valuations that hark back to the days of the Internet Bubble 15 years ago. Other stocks like Amazon.com, Inc. (Nasdaq: AMZN), Netflix, Inc. (Nasdaq: NFLX), and Tesla Motors Inc (Nasdaq: TSLA) are also trading in the stratosphere. And the entire stock market is flirting with extreme levels of overvaluation. Trees don't grow to the sky even if they are watered by central bankers.
Every investor looks like an Olympic swimmer when he is swimming in a bath tub – and the market has been the equivalent of a bath tub for the last few years as central bankers have pumped trillions of gallons of free money into the pool in order to make up for sluggish economic growth and an unprecedented build-up of debt.
Sooner or later investors are going to wake up and realize they've been swimming in the deep blue sea and not a bath tub and they are going to be looking up at a tsunami.
They should protect themselves while they can.
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.