Week after week, the news is filled with reports of law-breaking by institutions and individuals that hold positions of trust in society. Last week, FIFA, the body that rules the multi-billion dollar business of soccer, was hit by indictments of many of its senior officials who were charged with running a multi-year corruption scheme.
The week ended with former Speaker of the House of Representatives, Dennis Hastert – who for 8 years was the second in line to the presidency – being indicted for violating banking laws in connection with a scheme to pay hush money to a man with whom he had an illicit sexual relationship thirty years ago.
A week ago, several of the largest banks in the world agreed to pay $5.6 billion to settle charges that they manipulated foreign exchange rates. All of these institutions were serial offenders who had previously admitted to committing other serious financial crimes.
On top of it all, the U.S. presidential campaign is being conducted under the cloud of allegations that the presumptive Democratic nominee, Hillary Clinton, used her family's charitable foundation to solicit huge donations from foreign businesses and countries. And there are serious questions emerging about her tenure as Secretary of State and her independence from foreign influence were she to enter the White House.
There is something profoundly wrong with a world where those entrusted with power are consistently found to be corrupt. But it is even more disturbing that this corruption is treated as "business as usual" in the media and the markets.
Apathy Creates Stagnation
In a world now home to more than $200 trillion of debt, which has no hope of ever being repaid, there is a desperate need for leaders with character, intelligence and courage to forge solutions to intractable economic challenges. This need is compounded by a seriously deteriorating geopolitical situation abroad and rising violence on the streets of America.
Yet Americans are exhibiting a high degree of complacency about the world around them. This mass delusion comes at precisely the time when they should be crying out for radical change in their leaders and the policies that are bringing the world to its knees.
Financial markets continue to inhabit a universe dictated by the reckless and misguided policies of central banks who continue to print money like drunken sailors. Here in the U.S., the Federal Reserve continues to dither over raising interest rates after keeping them at zero for eight years and refuses to recognize that these low rates are themselves suppressing growth.
In Europe, Japan and China, central banks are printing trillions of dollars' worth of money to stimulate economies that already have too much debt. Meanwhile, what doesn't happen are much needed, pro-growth tax, labor and regulatory reforms.
Rather than acknowledge the fundamental reality, stock market investors only see free money. Stock prices are driven higher, and there is no thought given to the fact that these high share prices are being levitated by nothing more than funny money.
When You Can't Grow, You Merge and Acquire
One of the key indicators of an overvalued market is a boom in M&A. Last week was typical of what we have seen thus far in 2015, as a number of large and expensive mergers were announced. Charter Communications (Nasdaq: CHTR) agreed to buy Time-Warner Cable (NYSE: TWC) in a $79 billion deal – a much higher price than it offered to pay a couple of years ago -while Avago Technologies (Nasdaq: AVGO) agreed to buy Broadcom (Nasdaq: BRCM) in a $37 billion deal that valued BRCM at 19x cash flow. Late in the week, healthcare giant Humana (NYSE: HUM) was reported to have put itself up for sale.
Some believe that M&A is an indication of optimism on the part of corporate executives, but it usually signals that companies are running out of organic growth and are looking outside for new sources of growth. These deals inevitably lead to large layoffs and other cost cuts that are negative for economic growth.
Most deals fail to generate the synergies they promise; instead they line the pockets of corporate executives and shareholders. I would not be surprised to see the stock prices of the surviving companies much lower a year or two from now.
Signs of Fear are Starting to Show
Last week stocks took a breather after first quarter GDP was revised lower to a -0.7%. The Dow Jones Industrial Average lost 221 points or 1.2% to close at 18,010.68 while the S&P 500 fell 19 points or 0.9% to end the week at 2107.39. The Nasdaq Composite Index fell by 19 points or 0.4% to 5070.03.
The Dow Transportation Average fell 2.2%, which is considered a bad omen by those who adhere to Dow Theory, which holds that the Transports hold the key to the direction of the market. A faltering economy, which the GDP numbers point to, indicates that America's economic engine is sputtering. While there is an active debate about whether first quarter GDP was as weak as the -0.7% number indicates, it appears indisputable that first half growth is going to be disappointing.
The Atlanta Fed's real-time tracking of second quarter GDP is still showing growth at under 1%, so something is clearly dragging on the U.S. economy – most likely the ever-rising mountain of debt at every level of the economy, rising healthcare costs, and the inexorable weight of regulation burying businesses in needless paperwork.
But there is something else holding back the economy… The world has become a dangerous and uncertain place. Headlines matter and the headlines are ugly. Markets are driven by psychology. Complacency is still running high but it can shift on a dime. Nobody knows when it will reach a tipping point but there is enough bad news out there to cause such a shift. Investors should pay attention to potential sell-off triggers and, as always, proceed with caution.
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.