Bad, bad day yesterday. Municipal bonds took a big hit. California is going broke. The Dow finished down 178 points. Gold up $30.
Did you pay attention to our “Crash Alert” flag, dear reader? Hope so. This market is dangerous. Because it is built on a lie – that EZ money from the Fed’s printing press will cause stocks to rise, interest rates to go down, and the economy to revive.
It ain’t gonna happen.
Never in history has it worked that way. Ben Bernanke maintains that what he is doing is merely an extension of normal monetary policy. It’s not. It’s a daredevil maneuver in which the Fed funds about 100% of the US government’s borrowing needs over the next 8 months.
Will it do any good? It could cause a speculative boom in the stock market. Or a speculative bubble in commodities…or emerging markets…or anything else.
But real, genuine, honest-to-God prosperity? By just printing up money?
Nope. Not possible. It’s not that easy.
The risk is that investors may connect the dots. Let’s see… Stocks haven’t made them any money in 10 years. Yields are still down around 2% – so they can’t expect any decent returns from that quarter. And stocks are still expensive – with P/Es close to 20.
So, what can investors expect? Will P/Es go up? We can’t think of any reason why they should. Will stock prices rise? Again, they can do what they want…but we can’t think of any good reason for them to go up.
On the other hand, we can think of several good reasons for them to go down. The best one is this: that’s what markets do. They go from peak to valley…and back to peak. This one was at a record peak in 2000 and then another record peak in 2007…and still no valley. Stocks never got to be as cheap as you would expect at a major bottom. So, unless something has changed…that valley still lies ahead.
And wouldn’t it be just like Mr. Market to bring it on now? Investors are creeping cautiously back into the stock market. They took huge losses in ’07-’09. Their houses are down 30%…and still sinking. Many have lost their jobs. They have retirement ahead of them. And they haven’t saved enough money. So, they’re hoping to make some money now.
Meanwhile, the feds are hoping that this big $600 billion inflow of new money lifts stock prices. This is supposed to make people feel richer. Then they act richer…and then, like magic, they ARE richer.
But if the feds want stocks to go up, they should buy stocks, not bonds. When they buy bonds the money goes into the banking system. Does it end up long the US stock market? Or does it end up betting on gold or cotton or Indian stocks?
No one knows. But there is no guarantee that the feds’ gamble will raise stock prices. On the other hand, wouldn’t it be a cruel and obnoxious thing for Mr. Market to hit them all now with a major bear market?
Yes it would. Will he do it? We don’t know. But it’s a risk. Stay out of stocks. Buy gold on dips. Be happy.
for The Daily Reckoning
Since founding Agora Inc. in 1979, Bill Bonner has found success in numerous industries. His unique writing style, philanthropic undertakings and preservationist activities have been recognized by some of America's most respected authorities. With his friend and colleague Addison Wiggin, he co-founded The Daily Reckoning in 1999, and together they co-wrote the New York Times best-selling books Financial Reckoning Day and Empire of Debt. His other works include Mobs, Messiahs and Markets (with Lila Rajiva), Dice Have No Memory, and most recently, Hormegeddon: How Too Much of a Good Thing Leads to Disaster. His most recent project is The Bill Bonner Letter.
Bill, your stable of publications are almost all telling us which stocks to purchase, yet you tell us to stay out of them? Just wondering. But I pretty much am following your advice with the exception of mining and energy stocks.
Byron King updates his “Fifth Domain of War” thesis… and recommends what he considers the best cybersecurity play today...
Our economy, consumer society, and retirement programs are all in jeopardy in the face of a looming demographic dilemma. Read on to learn about the dire situation with pensions and social security, and what you can do to protect yourself...
David Stockman follows up on his first dispatch, making the case for Greece to default and leave the euro. He details the impact of such a move and more...
Charles Hugh Smith explains that promises made in flush times cannot be kept in lean times, especially when it comes to pension plans...
After Monday’s wild ride, the broad market has settled back into a boring “holding” pattern. Greg Guenthner highlights the select market sectors are way out in front for you. These are the places you need to invest in...