BALTIMORE, Maryland – What did we tell you…
The Janet Yellen Fed will not raise interest rates in any meaningful way anytime soon. Instead, she will announce new QE programs.
Yesterday, red was showing up just about everywhere – U.S. stocks, European stocks, Asian stocks, emerging markets stocks, crude oil…
But it could have been worse…
U.S. stocks recovered some of their losses for the day, after the minutes of the most recent Fed meeting showed Yellen and team still won’t pull the trigger on a rate hike until certain unspecified conditions are met.
According to the Fed, the conditions for a rate increase are “approaching” but haven’t been met yet.
Well, guess what… Conditions will never be met.
It doesn’t work that way. This economy will never recover – not as long as it is under the current Keynesian management. It is like a patient attended by quack doctors – doomed to get sicker from their quack “cures.”
Today’s economy depends on large doses of cheap credit…
And like morphine, you have to up the dosage just to stay in the same place. Take away the drugs, and the pain rises.
The pain caused by falling stock prices, for example.
Take away the cheap credit… and the buybacks on Wall Street dry up. That means earnings per share – the ultimate driver of stock prices – fall, too.
With falling corporate earnings and stagnant household incomes, the inevitable direction for stock prices is also down.
As we discussed in last Friday’s Diary, we’ve already seen that today’s stock prices are not the result of sober reflection on the part of investors.
They do not sit down with a yellow pad and a No. 2 pencil and calculate streams of income over the next 10 years. Instead, they count on the cronies to rig the market for their benefit.
As regular readers know, corporate execs have been borrowing at ultra-low rates and using the money to buy and cancel shares in their own companies. This clever piece of financial engineering reduces the count of outstanding shares and pushes up their value.
The insiders get bonuses… by looting the company’s capital and replacing it with debt. And shareholders get a nice bump in their portfolios.
Since 2009, the market cap of the S&P 500 has risen by almost $11.7 trillion.
And according to a new report from Aranca Investment Research, S&P 500 companies have spent almost $2.3 trillion on buybacks over the same period.
So about one-fifth of the increase in market cap is due to buybacks.
Cheap credit is essential to the looting process. Take it away and the flimflam falls apart. So do stock prices.
The “Recovery” Illusion
But the Fed can’t allow a real crash in the stock market. The “recovery” illusion is based on rising prices for equities.
Supposedly, this leads to a “wealth effect.” According to Fed doctrine, as investors see the values of their investment portfolios rise, they start to spend like drunken capitalists.
The economy is then supposed to explode with growth as “animal spirits” return to shoppers… leaving shiny coins all over the street for the poor to pick up.
Of course, it doesn’t happen…
Instead, the real spoils of cheap credit go to the C-suite cronies, who manipulate the stock market by pumping borrowed funds into buybacks. Stocks go up. But the real economy goes nowhere.
At the Sprott-Stansberry Natural Resource Symposium in Vancouver last month, our friend and Stansberry Research analyst Dr. Steve Sjuggerud debunked the idea that a rising interest rate cycle always coincides with falling stock prices. He pointed out that stocks have tended to rise in value during periods of rising rates.
Don’t worry about the Fed tightening, he told the audience. It doesn’t have to mean lower stock prices.
We don’t doubt that Steve is right. Typically, when the economy heats up due to organic growth, interest rates rise… and so do stocks.
But this is no typical bull market… and no typical economy.
The stock market is being driven higher by ultra-low rates, QE, and clever financial engineering. And the economy is not in the kind of healthy expansion mode that pushes up stock prices and interest rates at the same time.
Instead, much of today’s economy is as cold and lifeless as a corpse.
Commodities are plumbing record lows – most notably oil and “Dr. Copper,” widely seen to signal a deteriorating economy worldwide.
Shipping and freight prices reveal a slowdown in trade. (See today’s Market Insight below for more on that…)
A strong dollar, slowing exports, and falling commodities prices are hammering many of the emerging markets.
And China is struggling to avoid its own Great Depression.
That’s why Ms. Yellen is reluctant to raise rates. She knows it will be painful when she does.
Instead, she’ll administer another dose of morphine…
Further Reading: Audio recordings of the Sprott-Stansberry Natural Resource Symposium are now available for presale. It includes presentations from Bill, Steve Sjuggerud, Jim Rickards, Doug Casey, and many more. Go here to find out how you can get your copy.
Investors betting on a U.S. economic recovery should pay attention to transportation stocks.
The Dow Jones Transportation Average tracks the performance of 20 top U.S.-based transportation companies. These include airlines as well as trucking, delivery, and shipping companies.
As you can see from today’s chart, the DJTA is down 10% for the year… putting it in correction mode.
Transportation stocks tend to do well when economic activity is booming. And they tend to suffer when economic activity slumps.
This makes them a good proxy for the overall health of the economy.
And right now, the transportation stocks are trending down.
What’s the “Death Cross” Indicator? And Does It Matter?
You can’t read the financial press without hearing about the scary-sounding “Death Cross” indicator. But is it really a reason to fear a market meltdown? Or is it mostly myth, as some experts claim?
Gold: The Best Defense in a Currency War
Our colleague in London Dominic Frisby notes gold’s impressive reaction to China’s devaluation. Gold allows you to short central banks and their policies… making it a useful portfolio hedge.
Emerging Markets Are Now in “Crash Mode”
Since the MSCI Emerging Market peaked in late April of this year, it has lost more than 20%. And 9 out of 10 stocks in the index are now in an official bear market (down 20% or more)…
More praise for The Bill Bonner Letter and the Diary…
The last couple of letters are worth more to me than the cost of the subscription. Excellent! And thank you.
– Casey M.
I skip a lot of things, but I am never too busy to read these letters.
I have been reading them for years. I miss the old letters that often talked about the travails of maintaining the French “chateau” that the family lived in part of the year, and the other similar personal stories that used to be more frequent.
These stories always had a message beneath the charming details. Bill is the father, uncle, or brother that I wish I’d had.
But if everyone was exposed to such wisdom and good-natured wit, there would be nothing to write about, would there?
– Gary G.
Poignant, pointed piece of penmanship, one of your best….
– Rob W.
Readers also continue to take an interest in the marketing side of our business.
I was very glad you included Mary W.’s message about the Canadian Social Security system. I had the exact same response to Mary, leading me to wonder if I should even bother reading any more of your letters.
That kind of headline makes me want to delete, delete, delete. I would never click on a link just because I’m curious how it might work when it suggests I’m robbing from the Canadians to do so.
So I disagree that that’s the way to get people’s attention. I think your statement “Instead, it’s a way for investors, no matter where they are, to mimic the returns of the Canadian Pension Plan, which has gained 18.3% so far in 2015” is much more enticing and would make me want to know more.
– Ruth K.
Chris Comment: Thanks, Ruth. You make a great point about how to best get readers’ attention. It’s something we and our affiliates give a lot of thought to.
Newsletter marketing is highly data driven. The reason it often contains arresting ideas and statements is that experience tells us that this results in more people reading our offers.