Markets continued to worry about the upcoming Brexit vote while witnessing another version of the Federal Reserve's ongoing revival of Hamlet.
Something is indeed rotten in "Denmark," aka the Fed's headquarters in D.C.' Marriner Eccles Building – namely that the central bank has no clue what it is doing and appears hell-bent on driving the U.S. economy (and the rest of the world) over a cliff.
Janet Yellen said it herself…
Making Sense of Yellen's Gibberish
In fact, she admitted as much last week (at least the first part, that she has no idea what she is doing) in her press conference when she was asked by CNBC reported Steve Liesman if the Fed has lost credibility since it never does what it says it will do.
Her answer was largely incomprehensible – a paean perhaps to her predecessor Alan Greenspan who never met a sentence he couldn't mangle – but the gist of it was that she and her colleagues have no idea what is going on in the U.S. economy.
What that means in practical terms is that the Fed is not going to raise rates this summer and most likely won't raise them more than once if at all in 2016.
This was my original call back in January based on my view that the economy is weak. Downgrading its 2016 economic forecast for the third time last week (or is it the fourth? Who can keep track?), the Fed conceded that despite all of its huffing-and-puffing and jawboning, the economy is simply not responding to years of monetary stimulus.
One would think that such a conclusion would lead the gnomes in the Eccles Building to change course, but that is the last thing in their minds. They will not only continue on their current path but most likely double down if the economy enters recession, which is looking increasingly probable.
Here's how we can know…
Yield Curves Are Alarmingly Flat
With the 2/10 Treasury curve continuing to flatten and 10-year Treasury yields ending the week at 1.61%, the markets are telling us that recession risk is rising. And if one arrives, the Fed will not have the traditional 300-500 basis points of easing room in its hip pocket to save the day. Instead, it will feel compelled to launch another round of QE because – heaven forbid – our snowflake economy cannot be permitted to suffer even a quarter or two of negative growth.
The problem with such a scenario as with virtually everything the Fed and other central banks have done to try stimulate debt-laden and regulation-suffocated economies in recent years is that it will lead economic actors to become even more conservative in their spending and savings habits, leading the economy into further slowdown. Such is a world driven by static models that ignore how human beings actually behave.
Markets started to wise up to these worries last week…
Complacent Investors Are Waking Up Too Late
The Dow Jones Industrial Average fell 190 points or 1.1% to 17,675.16 while the S&P 500 dropped 25 points or 1.2% to 2071.22. The Nasdaq Composite Index lost 1.9% to 4800.34.
High-yield bonds also lost ground with the yield on the Barclays High Yield Bond Index now 30 basis points wider so far this month to 7.4%, still far too narrow to compensate investors for rising defaults and deteriorating credit quality.
There have been 87 global defaults this year and 60 U.S. defaults, but the year is still young and these numbers will get much worse before the music stops.
Investors should abandon their junk mutual funds and ETFs before the music turns into a funeral march, which it already has for so many borrowers.
While Treasury yields continued to drop, at least they remained above zero.
Germany joined the negative interest rate club last week as yields on its 10-year bunds dropped below zero, crowning the ECB's effort to destroy European bond markets.
The gravitational pull of low rates is no doubt contributing to lower U.S. rates on the theory that, in the land of the blind, the one-eyed man is king. But while rates may keep moving lower in the short term, generating capital gains for investors, this entire experiment is going to blow up in everyone's faces and generate trillions of dollars of losses for those who decided for whatever reason to buy or hold onto their low or negative yielding paper.
This entire regime is destroying the capital base of economies around the world, damaging pension funds, insurance companies, banks and individual savers. The sooner it ends the better regardless of the short term pain that ensues.
Hold Out… And You'll Hold Up
The way to protect yourself from what is coming is to refuse to succumb to the madness.
Hold cash instead of bonds (or if you are worried about your bank, hold 30 day Treasuries) and move more money into gold.
Gold is flirting with $1300 per ounce, but that is a chip shot compared to where gold will end up by the time central bankers are done destroying the world.
What's more, reduce or hedge your equity exposure and any high-yield bond exposure you have.
This is a time to preserve capital, not a time to risk it.
Get Michael's 2016 Gold Playbook and you'll find out exactly how to invest in gold for maximum profits and unbeatable protection. Click here to get the Playbook at no charge, and you'll get a complimentary subscription to Michael's Sure Money service.
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.