Volatility finally visited the stock market last week after the dullest summer in two decades as the hydra-headed Federal Reserve played Hamlet regarding its intentions regarding interest rates.
That description of the increasingly feckless Fed may constitute a mixed metaphor, but that is a small sin compared to the damage the group of former tenured economics professors are inflicting on the US economy with their policies.
The liberal (and clueless) mainstream press is criticizing Donald Trump for calling out the Fed for its destructive policies, but as a businessman who understands how the real economy works, he is correct to point out that more than 8 years of zero interest rates and trillions of dollars of bond purchases have distorted markets, increased income inequality and failed to ignite economic growth.
It is time for the Fed to move to normalize interest rates and allow markets to operate freely.
Unfortunately, there is little chance that it will move this month to raise interest rates…
The Government and Media Are Utterly Delusional
The Fed lacks the intellectual acuity or moral courage to stand up to narcissistic and cowardly equity investors who run for cover at the first sign of higher rates.
The Fed funds futures are pricing in only a 22% chance of a measly 25 basis point hike, which sits at an abysmal 0.25% to 0.50% (and people wonder why banks are reluctant to lend money on which they can't earn a decent return).
That is likely 22% higher than what is going to happen as long as the Fed is in the hands of people like Janet Yellen and Stanley Fischer who actually think that there is no inflation and that the unemployment rate is really under 5%.
America, you see, doesn't merely suffer from an economic deficit; it suffers from a profound moral and intellectual deficit among its political and policy classes. And those of us who call them out are demonized by the mainstream media.
But all you have to do is look at the facts instead of the distorted and politicized nonsense spewed out by the government and media to understand what is really going on – which is that the country is drowning in debt and stupidity.
And neither of the political candidates offers an antidote to either.
The Next President Can't Save Us
Instead, both offer more of the same – more debt, more entitlements, more sluggish growth.
Investors who are sitting on swollen stock portfolios thinking that they aren't ice skating on the deck of the Titanic must really think that Hillary Clinton has pneumonia or that Donald Trump is going to build a wall and make Mexico pay for it.
In the political race to the bottom, Trump has pulled even with Hillary, something that the market has not been pricing in.
This could add to further volatility in the weeks ahead.
All eyes will be on the first presidential cage match on September 26. I for one will have my popcorn and recorder ready for what will be a one-of-a-kind reality show for the ages (and I don't mean that in a complimentary way).
What to Do in These Widely Unpredictable Markets
Despite a break-out in volatility based on misplaced fears that the Fed might actually move in September (it won't), the Dow Jones Industrial Average actually rose slightly last week by 38 points or 0.2% to 18,123.80 while the S&P 500 added 11 points or 0.5% to 2139.16. The Nasdaq Composite Index, home to some of the most overvalued stocks in the history of the world, rose 2.3% to 5244.77.
More significant was the rise in the long end of the Treasury curve around the world. The 10-year Treasury yield ended the week slightly higher at 1.69%, but the moves in Japan and Europe were far more significant. Japan's 10-year bond, which was trading at -0.30%, has jumped to -0.05%, which is a significant move in percentage terms.
Large investors are starting to bet on a rise in bond yields predicated in part on a potential Trump victory; the 5/30 year Treasury spread has jumped 21 basis points to 124 basis points.
A steepening yield curve is usually considered a sign of economic strength but in today's wacky world it is hard to know what it means.
Both the Fed and the Bank of Japan meet on September 21. While the Fed is likely to do nothing, which would be stupid, the BOJ is more likely to do something that would be wildly stupid, like announce it is going to buy foreign bonds or more stocks or ETFs.
Rather than focus on the chicken-hearted Fed, investors would do better to focus on (and fear) the BOJ, which has little to lose as Japan's economy keeps sinking into the sea under the weight of debt and demographics.
In sum, anyone who thinks he or she knows what is going to happen between now and the end of the year is delusional. Investors should be proceeding with a high degree of caution. That means ignore your broker, your golf buddies, and anyone else advising you to own stocks and bonds.
The weight of risks is decidedly against you. Reduce your stock exposure (or hedge it), buy gold and save yourselves.
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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.