Stocks resumed their rally last week after Janet Yellen reassured investors that things are so bad she won't raise interest rates any time soon. The Dow Jones Industrial Average jumped 277 points, or 1.6%, to 17,792.75 while the S&P 500 added 37 points, or 1.8%, on this idiotic "bad news is good news" scenario.
The Nasdaq Composite Index joined in the party, rising 3% to 4914.54 and could soon breach the meaningless 5000 level again as investors pour money back into the grossly overvalued FANGs.
The state of the world was characterized by the contrast between two articles in The Wall Street Journal last Wednesday, March 30. The first page of the newspaper featured an article discussing how institutions are pouring record amounts of money into venture capital funds.
But if readers turned to the first page of Section C, they read how Fidelity and other large mutual fund companies are marking down the value of their venture capital investments in social media companies such as Dropbox and Zenefits by as much as 40%.
We are in the final stages of an epic bubble inflated by the feckless policies of the Fed. And a lot of people (thanks to the equal incompetence of the institutions that manage their money) are going to lose a lot of money.
The Inexplicable Lure of Bad Ideas
Perhaps the fact that investors keep rewarding themselves with higher stock prices for the bad policies of the Fed and other global central banks is no different than voters thinking that electing an unprepared, and clearly temperamentally unsuited, man like Donald Trump to the Oval Office is a good idea.
The country already made a very similar mistake seven years ago, yet the American people seem eager to tempt fate once again. The good news – and this may be another reason why markets rallied this week – is that Mr. Trump's circus act is finally starting to wear thin. A loss in Wisconsin this Tuesday will make it all but impossible for him to enter the Republican convention this summer with enough delegates to win the nomination on the first ballot.
After that, it's anybody's guess who will emerge with the nomination but it will definitely be somebody better prepared and less disruptive to markets than "the New Yorker". Make no mistake, markets will breathe a big sigh of relief once the Trump threat has passed even if they are left with a Democrat in the White House.
Another reason stocks rallied this week was further weakness in the US dollar. The US Dollar Index (DXY) dropped from above 96 on Monday to 94.61 on Friday, closer to the bottom of its 52-week range of 92.62/100.51. This was a reaction to Mrs. Yellen's dovish comments but is most likely a short-term trading phenomenon rather than a long-term trend.
Global Markets Are Out of Options
As incompetent and destructive as the Fed's policies are, the policies of its European, Japanese and Chinese brethren are even worse. These other central banks have no choice but to weaken their currencies in order to deal with terminally ill economies, leaving the US dollar as the best house in an increasingly lousy neighborhood.
While investors have summoned up the courage to buy stocks again, the truth is that they have few attractive alternatives. Bonds remain an investment wasteland. MLPs are an ongoing disaster (for example, investors are discovering every day that they owe taxes on these investments even when they lost money).
Commodities remain very dangerous (oil prices dropped last week as hopes for OPEC production cutbacks were dashed again). Stocks are the only game in town. Unfortunately, they are fully if not overvalued. They squeezed out a slight gain in the first quarter after dropping sharply in January, an impressive recovery. But I still believe we are in a bear market and that investors should use this reprieve to reduce exposures and batten down the hatches…
Finally, we owe a deep debt of gratitude to the crack bankers at JP Morgan who made life miserable for some poor guy who made out a check to his dog walker and wrote on the bottom of the check the name of his dog, "Dash." Apparently, some genius at JP Morgan decided that "Dash" was uncomfortably close to the word "Daesh," the Arabic word for ISIS.
Fearing that the check writer was as much as a moron as the JP Morgan employee is and would actually write out a check to ISIS, he stopped the check and had the check writer questioned by authorities.
With individuals like this voting, nobody should be surprised that America is facing an election between a circus barker and a pathological liar…Buy gold and save yourselves.
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.