-- Posted Thursday, 20 May 2004 | Digg This Article
Quite the interesting stock market environment we find ourselves in lately, is it not? The data is bullish, the so-called recovery appears to be in full swing (the operative word being “appears”) and yet the S&P 500 has broken under critical support to post a new 7-month low. The topping formation we’ve been discussing at The Sovereign Strategist for months looks to be confirmed, the “mini-bull” market hasn’t seen new highs in seemingly forever, and the light is now green for sharply lower stock prices in months to come.
Hey man! What gives? Isn’t this what the bulls have been waiting for? How can stocks be acting so cruddy when everything seems to be going so well? “Interest rates, man! They’re gonna’ raise ‘em. Not good for stocks.”
Is that right? Has anybody noticed that the Fed funds rate stands at 1%, a major historical low, and a low so low that it’s considered at least a couple hundred basis points below where it should be? If the recovery is real, railing about a rate increase from these lows is like Rosie O’Donnell locked up in a cake shop, worrying about the ham sandwich she left in the glovebox.
If the economy is so bloody good, who cares if rates rise from a measly 1% to a just-slightly-less-measly 1.25%? Or 1.5% for that matter? Is this “full-fledged” recovery to come under threat with a 50 bp increase? Surely a strong recovery can withstand a little rise from a nearly half-century low, can it not?
Right there you have it, folks. The most telling indication that the stock market is in trouble, that all this ballyhoo about a strong economy is not quite what it appears to be. In bull markets, stocks respond favorably to good news and ignore the bad news. Where are we today? The market has ignored most of the good news, failed to extend its highs and is OBSESSED WITH BAD NEWS.
Myth: Stocks have been in a bull market in anticipation that a strong economic recovery is on the way. Investors are worried that higher rates may choke off the recovery.
Reality: Stocks rallied because the Fed flooded us with easy money and encouraged (once again) rampant speculation by leaving investors with no reasonable alternative. NOW THAT THE PARTY IS OVER, THE MARKET IS RUNNING SCARED.
And the economy has nothing to do with it.
The market isn’t stupid, folks. The market did what it had to do, left with no favorable alternative. Throw money out of helicopters and investors will scoop it up and do something with it, and most likely NOT put it in the bank to collect a paltry 0.5%. The market also recognizes that the Fed leaving Fed funds at what Jim Grant calls an “emergency rate” of 1% is a sign that things are not half as hunky-dory as the financial spin-doctoring would have us believe.
Actions speak louder than words. The Fed says we’re recovering. Their action, maintaining Fed funds at an EMERGENCY rate of 1% says something is wrong. Such is the nature of an “emergency”, no?
If the economy is really so bloody wonderful, why is the stock market running scared? The answer is quite simple: because the market rallied for little reason other than exceptionally low interest rates and now that the party is over, the market has no reason to rally further.
“Oh but what about that economic recovery? That’s kicking into swing and it should be good for stocks.”
You mean the recovery that is still failing to achieve its most critical task of creating jobs? The one that is generating jobs, not in reality, but only on paper?
Recently I discussed how most of the 308,000 jobs in the March report can be primarily attributed to an increase of 300,000 part-time jobs. And according to the Hoisington Report, 270,000 of the reported 288,000 April increase are nothing more than statistical mumbo-jumbo, extrapolations based on government assumptions. Nothing real, nothing confirmed, just stuff assumed. Weapons of Mass Economic Improvement, you might say. Nowhere to be found, but they make for darn good press!
(By the way, according to Comstock Partners, even if we take the last two months of growth at face value, the economy has only generated a net of 31,000 jobs since the recession ended 29 months ago!)
Look no further than the stock market for your evidence that the recovery is a sham. If this news was real, the market wouldn’t be sitting where it is, obsessing about a trivial rate increase amid such bullish news. If this is news was real, it’d be evidence that the recovery is finally kicking in to swing, that the last piece of the puzzle was in place and that REAL jobs were finally increasing. The market would be ecstatic.
But the market is anything but ecstatic because the market isn’t quite stupid enough to buy into government lies and fabrications. The market is bloody well aware of why it is where it is and why being where it was is no longer justified.
Of course the other side of the argument, and admittedly the more conventional one, is that the market fears that the Fed will be forced to raise rates quickly and in a big way because the economy is getting onto such a tear that any hesitation on their part will only serve to firmly entrench inflation. The bond market, already anticipating increased inflation, will crater, jacking up interest rates and pressuring stocks still further.
Perhaps that view is more palatable and more in keeping with traditional economic theory that assumes the Fed and government aren’t a bunch of self-serving, statistics-fudging liars and if you prefer it, you’re welcome to it.
Regardless, the potential results for the stock market are equally as devastating. Whether we’re in trouble due to a too-slow-to-act Fed or whether we’re in trouble due to an economy that is not as healthy as official figures may indicate, we’re in trouble either way. When all is said and done, it matters not why your stock holdings have been decimated, only that they have!
Fundamentally, regardless of the views you prescribe to, the fact remains that the stock market rally was predicated upon excessively low rates and our economy is now addicted to excessively low rates.
From a technical perspective the S&P 500’s recent move to a 7-month low confirmed a major topping formation and sends a loud and clear signal that the mini-bull has topped out. Normally, I’d be suggesting that folks sell the hell out of it, sit back and enjoy the profits. But I’m not being quite that aggressive this time around. In fact, I’ve urged subscribers to be careful and to be prepared for some surprised because, as I’ve been saying for some time, “they” (the powers that be) won’t let this thing go down easy. They can’t afford to.
The sad reality is that we live in an age wherein governments that extol the virtues of free markets will stop at almost nothing to manipulate them to their own ends. We have a Fed Chairman who prattles on about low inflation as our bills rise on a monthly basis and gasoline prices routinely post new all-time highs. We have the Labor Dept. fabricating numbers that private economists and journalists like John Crudele routinely expose as being fat loads of hooey. And we have, by Executive Order 12631, a “Working Group on Financial Markets” charged with the responsibility of doing whatever it takes to prevent the market from taking its normal and necessary course.
In the end the market always wins, but after watching years of this nonsense go by, I have to acknowledge the fact that the higher-ups have more tricks up their sleeves than I’m aware of. I think the stock market “echo-bubble”, a major bear market rally has peaked. I’m certain that no new major bull market is underway. But will the market fall fast and hard as so many bears are forecasting? On that point I can’t agree. I don’t disagree, but I can’t wholeheartedly agree either.
John Maynard Keynes once said that the market can stay stupid longer than you can stay solvent (I’m paraphrasing.) An updated version of that might be “the feds can keep throwing unlimited resources at the markets at the expense of the nation’s long-term health for longer than you can sit confidently on your short positions.” I say go short, but don’t expect the profits to come as easily as they did the last time around.
Mark M. Rostenko
Editor
The Sovereign Strategist
Mark M. Rostenko, a veteran of Chicago's commodity exchanges and editor of The Sovereign Strategist, spends far too much of his time enthralled by the never-ending procession of inane prattle emanating from Wall Street. Nonetheless, it hasn't stood in the way of accurately forecasting the dollar's top, the beginning of the gold bull market, and nearly every significant turning point in the stock market since the bear market began. Please visit www.sovereignstrategist.com for a free sample issue and more commentary. And while you're there, feel free to join our international family of well-informed and successful investors.
-- Posted Thursday, 20 May 2004 | Digg This Article
