Skip to comments.The Fed, The Market, The Crash, and Wasted Time
Posted on 03/08/2014 7:14:30 AM PST by Kaslin
Main Street is at a crossroads, which means the nation is at a crossroads. Will people finally start to spend money they don't have? After being bruised and battered, even those that have seen home values rebound and incomes that are staying ahead of the rate of inflation, there is serious doubt and hesitation. Those are the lucky few, for the rest of the nation, spending on credit is a bridge too far. This underscores the dilemma of the Federal Reserve, which in my mind gets too much credit for the stock market rally; not all that money printing has resulted in a fatter wallet.
In the classic sense, all of that money printing should have made its way to Main Street as banks pushed out more loans for personal and business use. This should have created a demand-pull version of inflation (see table). Pat your pocket, and tell me if you have extra cash that you are eager to spend? Then there's cost-push inflation, where prices move higher as businesses cope, but there are only a few spotty areas of such price hikes and none from higher wages (see table). The problem is we are actually taking home less money than before the recession began.
Definition of Inflation
Demand-Pull Inflation - This theory can be summarized as "too much money chasing too few goods". In other words, if demand is growing faster than supply, prices will increase. This usually occurs in growing economies.
Cost-Push Inflation - When companies' costs go up, they need to increase prices to maintain their profit margins. Increased costs can include things such as wages, taxes, or increased costs of imports.
There's no doubt that institutions are buying stocks and professionals are seeking best-case scenarios for return, but we aren't seeing the bum's rush or that massive bond rotation that should have started with a lot of vigor a long time ago. Our work says the majority of the rally is from real earnings growth generated outside the United States, the productivity miracle (euphemism for software and robots replacing humans), and the hype factor (see new technology names).
Considering the bond rally is 30-years old one would have thought investors would be tripping over themselves to exit, but that is not happening-yet. Moreover, the Fed has tapered twice and will most likely taper again. For those who have never read income statements and balance sheets, but have spent the last five years telling people to avoid stocks; it's the taper. The taper that coincides with the actual correction will be the one where one will say, 'I told you so.' Nevertheless, many thought the crash would happen the day tapering was announced - the same day the Dow rallied 300 points.
The Virtuous Cycle
The virtuous cycle kicks in when people spend money they do not have. That has not happened, although people are spending money. In fact, the scuttlebutt regarding the woes of retail is skewed incorrectly. Even after its revision of the fourth quarter 2013, personal spending was +2.6%, the fast pace of the first quarter of 2012.That spending is coming at the expense of savings. People dip into their savings or gather a few paychecks, then hit the malls. That is not going to spark the virtuous cycle, but neither will a higher minimum-wage.
Take a look at gross dollar volumes (GDV) for Master Card over the past five years. Consider in 2007, GDV in America added up to $645 billion, while debit was only $373 billion. Since 2009, volume on credit cards has barely budged while rising 74% on debit cards. Yes, we like to spend money, but we aren't spending what we don't have to the chagrin of the Fed.
I have felt all along all that cash would come gushing out of the pores of the financial system onto Main Street resulting in a more parabolic spike in stocks and credit spending and other actions that underscore throwing caution to the wind.
The Other Threat
One may think cooler heads always prevail when it comes to geopolitical events. However, there have been too many wars in the history of mankind; that belie such a notion. For those with large portfolios, one form of insurance is the inverse ETFs that trades one to one, or up to three times the move of the underlying sector.
Then there is NUGT, which mimics the upside move in gold multiplied by factor of two. In the past few years, we have asked subscribers to go long on one of these and lost - but who wants to cash in an insurance policy? Investing is not for the 'faint of heart.' Our preferred approach is to raise cash, hold great companies, and buy others during bouts of weakness. I do not think we are there yet, but the market is long in the tooth. I saw lots of profit-taking in high-tech names, and intra-day reversals to the downside, so anxiety is building.
There are a lot of bitter and miserable people out there, who are not content enough to live in isolation and wait for the end. They carry signs: "The End is near." Many do not manage money, or spend time doing real analysis. It does not matter; they sell books and are on television. The market is cyclical and corrections and crashes happen eventually; they could cash in, sell more books, and get more airtime, even if the people who followed their advice missed 10,000 Dow points, and took huge losses selling everything and plowed it all into gold. (I happen to like gold coins, but stressed max 10% investing assets.)
It is a dumb game I hate playing. When there is no accountability, you can be wrong for years, when people rely on you day-to-day; each tick in the wrong direction will give you heartburn. This is a life-long endeavor, the next crash will create another buying opportunity, and maybe this time the millions of people who missed this rally will take advantage, unless they are out there buying more doom-and-gloom books. I do not live for the crash; and I know that not a single person at my local mall this Saturday will cite the Fed for their shopping bags.
It is tougher now to find value and the volatility will make for discomfort, but it is still worth being an investor.
A few years ago, many conservatives thought Obama was part of a communist plot to take over our country and that we would never get rid of him. Hence, the greatest free market engine in the world was going to die.
But as Obama has turned out to be an inept bumbler instead of an effective tyrant, we now see that there will be an America left after Obama. It will be deeply in debt, but we can and will survive...and even become great again.
There is an element of this thinking in the market at present. And the market doesn't just reflect prosperity...it is discounted future performance and a very effective gauge of optimism.
Invest in junk silver, land and food and ammo.
No, that's a bubble. The reason is that the money can only be spent on consumables creating a bubble (e.g. housing), then raising demands for resources, then creating a resource bubble. Those are all unsustainable. They draw money from long term investments into short term speculation. Furthermore the Fed's printing undermines long term confidence in the dollar which also forces people into short term speculation.
The virtuous cycle kicks in when people defer consumption and choose to invest and innovate instead. The resulting new products and lower costs drive demand and the real economic growth (not "growth" faked by added inflation) increases wealth.
Real wealth creation comes from people working not from creating money out of thin air. Most of the wealth creating jobs we used to have in this country have been moved to Red China. That wealth we used to enjoy is now being created in Red China. What we create now is paper debt and hot air. A First world country can’t be sustained by debt and hot air.
I think the ETF “NUGT” is a double or triple UP on the gold miners, not gold bullion. The inverse I believe is “DUST”.
Borrow and spend, you peasants, and look busy! Charles needs more money.