Bank of Japan head Haruhiko Kuroda aimed his kamikaze plane straight at the global economy last week, and scored a direct hit by imposing negative interest rates in Japan for the first time in this cycle.
In doing so, he joined his reckless European banking brother Mario Draghi and increased the volume of global sovereign debt with negative interest rates to $5 trillion dollars.
This type of monetary insanity can only end one way – in the destruction of capitalism whose very laws it violates by confiscating capital from retirees, insurance companies, pension funds and others who require a positive return to survive.
This was another step on the road to financial Armageddon, but there's still money to be made if you make the smart move…
Yes, It Gets Worse from Here
More disturbing than the act of imposing negative rates was the celebration of the move by global stock markets.
The fact that stock investors have the attention spans of fruit flies is not going to serve as an excuse when they get wiped out in the next crisis. Mr. Kuroda's move weakened the Japanese yen by about 2%, which should help Japanese exports and boost the stocks of Japanese exporters. But years of low interest rates and quantitative easing did nothing to move Japan out of decades of economic stagnation.
Believing that they will suddenly work is a triumph of hope over experience. It is also a twist on the adage that the working definition of insanity is trying the same thing over and over again and expecting a different result.
Substitute the word "stupidity" for "insanity" and you describe what Kuroda, along with central bankers around the world, keep doing.
Japan needs to change other policies like encouraging immigration, easing work rules, lowering taxes and the like to have any hope of igniting economic growth. Cheapening its currency just punishes its own citizens and intensifies the ongoing currency war with China, South Korea and other Asian competitors.
The Japanese stock market may go up for now but the rest of the economy is going down.
We've Seen This Bubble Before
Back in the U.S. of A., markets partied like it's 1999.
And maybe it is… since markets are in the midst of a bear, and the energy sector today has many similarities to the Internet Bubble of the turn of the century – especially in the junk bond market which is coming apart at the seams.
The Internet Bubble was fueled by massive amounts of cheap equity and debt flowing to new tech start-ups.
In the aftermath of the financial crisis in 2009-2013, the fracking revolution attracted tens of billions of new capital to fund new projects on the assumption that oil would stay at $100/barrel forever.
Both of these bubbles ended in tears – and took down the rest of the market with them.
Oil bounced a bit last week after false reports that Saudi Arabia was prepared to consider production cutbacks, but it remains mired in a deep depression that has no end in sight.
Investors should not be fooled – the problems in oil, the rest of the commodities complex, the junk bond market and the stock market are far from over.
Nonetheless, stocks lived to play another day last week, which means they can suck more gullible investors into losing even more money when they take their next leg down.
The Dow Jones Industrial Average gained 373 points or 2.3% to 16466.30 while the S&P 500 rose 1.8% or 33 points to 1940.24, though both were down more than 5% in January. The Nasdaq Composite Index squeezed out a 0.5% gain to 4613.95 last week and is down -7.86% on the year.
The junk bond market rallied last week as well, reducing the total return loss on the Barclays High Yield Bond Index to -1.96%. The average yield and spread on the index backed off from the week before by about 50 basis points to 9.26% and 737 basis points, respectively.
Again: Do not be fooled – financing in both the junk bond and bank loan markets has dried up and borrowers are having to make big concessions to complete deals that were announced months ago. This is reflected in the depressed prices of the stocks of the large public private equity firms – Blackstone Group LP (NYSE:BX), Apollo Global Management LLC (NYSE:APO), Ares Management LP (NYSE:ARES), The Carlyle Group LP (NYSE:CG), and Fortress Investment Group LLC (NYSE:FIG).
I still expect these stocks to drop further and they should be avoided until further notice.
But there is a way to make money on the ever-popular Facebook Inc. (Nasdaq: FB), Amazon.com Inc. (Nasdaq:AMZN), Netflix Inc. (Nasdaq:NFLX), and Google/Alphabet Inc. (Nasdaq:GOOG) – the so-called "FANGs"…
How I'm Playing the FANG Stocks Right Now
The FANG stocks, bounced all over the place this week after Facebook announced blockbuster earnings, pushing its stock up 14.5% on the week to $112.21.
For some reason, investors figured that the other FANGs would have similar results and piled into Alphabet, Amazon, and Netflix after Facebook's earnings announcement and ended up getting badly burned when Amazon announced disappointing earnings.
Now, Alphabet stock recovered and kept its gains, but Netflix is down nearly 20% year-to-date and for the moment Amazon is a study in market lunacy.
AMZN shares were up over $50 per share during the day of its earnings announcement; as soon as it reported after the market closed, its stock plunged by over $70 per share in afterhours trading and ended the week pretty much where it started at $587.00 per share, down 13% on the year.
For now, Amazon remains a great company with a ridiculously overvalued stock. It has created a new model for capitalism – the only problem is that in doing so, it has destroyed not only its own profit margins but the profit margins of every company with whom it competes.
I would stay short Amazon (by buying long-dated puts) because the stock could easily drop much further as it continues to generate extremely low earnings on a rising tide of revenues and expenses.
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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.