Just because central bankers want to lead investors over the cliff like they did in 2008 doesn't mean that people should follow them.
Unfortunately, that's exactly what investors did last week. In a year that has seen many foolish rallies, Friday's massive rally in stocks – coming just a day after a massive sell-off – was the most foolish of all.
The rally was triggered by two pieces of news. The first was a jobs report that the mainstream media characterized as "strong" when it was nothing of the sort.
The second was European Central Bank President Mario Draghi back-tracking from comments made just a day earlier that indicated that he would not move as aggressively as investors were betting to devalue the European currency through more quantitative easing.
Let's take these one at a time…
These Numbers Are Pure Science Fiction
In November, the U.S. economy added 211,000 non-farm payroll jobs, bringing the average gain for the year also to 211,000. Leaving aside for the moment that this is a made-up number based on a bunch of statistical adjustments by the government, it is much lower than the average of 260,000 monthly jobs in 2014 and only slightly higher than the pathetic average of 193,000 monthly jobs in 2013.
But none of these numbers is anything to write home about in a country with a population of 315 million people.
When Bill Gross was still at PIMCO, the firm came up with a catchy phrase to describe the slow economic growth and low investment returns that its investors were likely to experience in the years ahead – it called this the "new normal."
Well, the "new normal" for employment is a bogus unemployment figure of 5% but a much higher actual unemployment number if we were to adjust it for the lowest labor participation rate in 40 years.
In fact, if the labor participation rate today were the same as it was when Barack Obama took office in January 2009, before he was able to inflict Obamacare and countless other anti-growth regulations on the U.S. economy, the unemployment rate would be over 9%.
The mainstream media doesn't want to report this for two reasons: first, it is economically illiterate; and second, it suffers from a liberal bias.
But the facts are as I have stated them and why investors would celebrate another jobs number is another reason why we are already in a bear market without most people realizing it – and why investors are experiencing such lousy returns this year.
And then there's Europe…
"Super Mario" Leaves Investors High and Dry
Mario Draghi disappointed spoiled markets on Thursday by offering less in the way of new funny money to prop up the terminally broken European economy. This sent the euro skyrocketing from $1.06 to $1.09 and inflicted 3-5% daily losses on large hedge funds that don't seem to make any money when things go their way but manage to lose big when they are wrong-footed.
Seeing the damage he had wrought, Draghi backpedaled on Friday by dismissing speculation that he was held back by dissent from Germany and promised to be more aggressive if necessary with his policies.
Investors who had been burned the day before naturally jumped all over this nonsense and bid back up the stocks that had dropped the day before.
The only problem with this is that Draghi can print money until the cows come home but it won't do a thing to help Europe's broken economic model or ailing economy. That would require fiscal reforms that the region's politicians refuse to adapt.
After years of seeing central bank policies fail, investors should realize that they are literally being led over the cliff by pied pipers of destruction. I trust readers of this publication are wiser than that.
Don't Kid Yourself – the Bear Market Is Here Now
As a result of Friday's rally, the Dow Jones Industrial Average eked out a 49 point or 0.3% gain on the week to 17,847.63 while the S&P 500 edged up 2 points or 0.1%. The Nasdaq Composite Index added 0.3% to 5142.27.
These averages tell very little about what is really happening in U.S. stocks, however. Away from a limited group of large cap stocks including Amazon.com Inc. (Nasdaq:AMZN), Facebook, Inc. (Nasdaq:FB), General Electric Co. (NYSE:GE), Apple Inc. (Nasdaq: AAPL), Netflix Inc. (Nasdaq:NFLX), Priceline Group Inc. (Nasdaq:PCLN), eBay Inc. (Nasdaq:EBAY), Starbucks Corp. (Nasdaq:SBUX), Microsoft Corp. (Nasdaq:MSFT), and salesforce.com, Inc. (NYSE:CRM), most of the market is already in a stealth bear market and certain sectors like energy and commodity-related stocks are in a crash as bad as 2008/9.
Those reading this and looking at their portfolios know this to be true. At the beginning of the year, I forecast the S&P 500 to end the year at around 1875 to 1900, a level that the index hit in August and again in September before rebounding.
The headline number hides the fact that most stocks have performed even worse than I expected. Next year, I expect the stocks that held up the market to follow.
The credit markets are in even worse shape because unlike the stock market they suffer from terrible liquidity.
While the average yield and spread on the Barclays High Yield Index are still roughly 8% and 600 basis points, the CCC-rated sector is trading at distressed average yields and spreads of 14.5% and 1200 basis points.
But even those levels don't really tell the story because it is very difficult to trade most bonds.
To give you an illustration of the carnage, take a look at the retail sector. Right now, Bon-Ton Stores Inc. (BONT), Nine West (operated by The Jones Group Inc. (NYSE:JNY), J. Crew, Claire's Inc., The Gymboree Corp. (Nasdaq:GYMB) and Rue21 Inc. (Nasdaq:RUE) are all trading as though they are on the brink of default.
Many of these companies' bonds are trading in the 20s (that is, 20% of par value).
So far in 2015, RadioShack Corp. (FRA:TAN), American Apparel Inc. (OTCMKTS:APPCQ) and Quiksilver Inc. (OTCMKTS:ZQKSQ) bitten the dust and filed for bankruptcy. And this is just one sector – believe me, the energy sector, which is much larger, looks a lot worse!
The credit markets usually signal trouble ahead for equities so investors should be looking not just at large junk bond ETFs like the iShare iBoxx $ High Yield Corp. Bond (ETF) (NYSEArca:HYG) and the SPDR Barclays Capital High Yield Bond ETF (NYSEArca:JNK), which don't tell the whole story since many of the bonds they hold don't trade actively, and focus on individual company bonds to understand what is really happening in the economy and the markets.
Unfortunately, doing so might ruin your holiday, but of course losing money will make it even worse.
If I could give each of you one Christmas present this year – other than a subscription to Sure Money Investor (you can take one for free here) or a copy of my forthcoming book, The Committee to Destroy the World) – it would be this piece of advice…
Ignore what the mainstream financial media is telling you.
They have been consistently wrong about everything and have nothing to offer you. If you want to know what's really going on, you know where to look.
The "stealth" bear market won't stay hidden forever. By the time investors realize the bears are running in earnest, most of them will be broke… unless they read Michael's Super Crash Report. It's full of actionable investing recommendations, stock picks, and trading strategies for the unfolding $200 trillion credit meltdown. Click here for the report, and you'll get a subscription to Sure Money Investor at no charge.
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.