Two New Super Bubbles Created Thanks to Easy Money Policies

Two New Super Bubbles Created Thanks to Easy Money Policies image Two New Super Bubbles CreatedTwo New Super Bubbles CreatedIn his recent essay published in the New York Times, David A. Stockman, President Ronald Reagan’s budget director from 1981 to 1985, said that there is a bubble waiting to explode due to the “flood of phony money from the Federal Reserve.” (Source: Stockman, D.A., “State-Wrecked: The Corruption of Capitalism in America,” New York Times, March 30, 2013.)

Stockman further explained that once the bubble actually bursts, the U.S. economy will be left in ruins. To quote, “When it bursts, there will be no new round of bailouts like the ones the banks got in 2008. Instead, America will descend into an era of zero-sum austerity and virulent political conflict, extinguishing even today’s feeble remnants of economic growth.” (Source: Ibid.)

Reading Stockman’s piece, I can’t help but wonder if he is one of the half a million people who read Profit Confidential. As my readers know, I’ve been very skeptical about quantitative easing in the U.S. economy. It may have been needed back in 2009, when the financial system was on the verge of collapse, but I doubt its ongoing $85.0-billion-a-month purpose today.

By keeping interest rates artificially low and issuing multiple rounds of quantitative easing, continuously suppressing bond yields, the Federal Reserve has killed fixed-income returns for investors. Those who took part in the junk bond market in desperate search of higher yields are taking more risk.

In 2008, only $43.0 billion worth of high-yield corporate bonds (often called “junk bonds”) were issued. Fast-forward to 2012, and this number increases to $329.2 billion. (Source: Securities Industry and Financial Markets Association web site, last accessed April 3, 2013.) The simple calculation would show that the issuance of high-yield bonds have increased more than 665%!

The Federal Reserve’s goal with easy monetary policy and quantitative easing was to encourage American consumers and businesses to spend. This way, the U.S. economy moves toward economic prosperity.

Unfortunately, instead of economic growth from quantitative easy, we’ve created bubbles for both the stock market and the bond market.

Quantitative easing hasn’t worked out quite as the Federal Reserve expected, and I doubt it will now. Look at the Japanese economy. It is still struggling after multiple rounds of quantitative easing and a multiyear extended period of low interest rates. (Japan’s debt-to-gross domestic product [GDP] has surpassed 200%.)

The U.S. economy has fundamental problems that can’t be fixed by throwing money at them. Quantitative easing and low interest rates are both short-term fixes—and long-term evils, as they are more likely to create bubbles than take us to the path of economic growth.

Michael’s Personal Notes:

The slowing global economy will take a heavy toll on an already struggling U.S. economy. Why? Because a significant number of U.S. companies operate globally. If there is an economic slowdown in the global economy, then these companies will see their profitability shrink.

And demand in the global economy is definitely slowing. Take a look at the chart of the S&P GSCI Commodity Index below. This index tracks the performance of 24 different commodities over time.

Two New Super Bubbles Created Thanks to Easy Money Policies image GNX SP GSCI Commodity Spot Price stock chart1$GNX S&P GSCI Commodity Spot Price stock chart

Chart courtesy of www.StockCharts.com

Unfortunately, nine of the 24 commodities making up the S&P GSCI Commodity Index are in a bear market—they have declined more than 20% from their highs. (Source: Bloomberg, April 2, 2013.) The index itself has been in decline since mid-September of last year.

To add to the misery, since July of 2012, the International Monetary Fund (IMF) has slashed its estimates for economic growth in the global economy three times.

Major economic hubs in the global economy are also struggling; they are begging for growth. In 2013, China is expected to post its slowest growth rate in years. Germany and France, two key economic hubs in the eurozone, are struggling to keep up with economic pressures faced by other countries in the region. In Cyprus, if you have more than 100,000 euros in the bank, the government is basically stealing a good chunk of it. Japan is in an outright recession. Emerging markets, like Brazil, are in hardships due to declining exports.

According to the IMF, Canada, one of the largest trading partners to the U.S. economy, is expected to grow at a rate of only 1.8% this year. In 2011, Canada’s economy grew at a pace of 2.6%.

Dear reader, what’s happening in the rest of the world leaves the U.S. economy vulnerable. We haven’t seen any real economic growth since the financial crisis. Now, with threats from the global economy emerging, the growth outlook appears even more dismal.

Today’s rising stock market doesn’t equal economic growth. And that’s why investors should be very careful about higher stock prices.

Where the Market Stands; Where It’s Headed:

My eight reasons why I believe the stock market is at or close to a top:

1. Corporate insiders are dumping stock.

2. Bullishness amongst stock advisors is at a multi-month high.

3. Companies are propping up earnings with record stock buyback programs.

4. Corporate earnings growth will be negative again in the first quarter of 2013.

5. The global economy is slowing. Certain countries in the eurozone are in a depression. The U.S. economy could be contracting.

6. The percentage of assets that mutual funds have invested in the stock market is near a multiyear high.

7. The underemployment rate (which is the unemployment rate taking into consideration people who have stopped looking for work and people who have part-time jobs but want full-time jobs) is over 14%—it really hasn’t changed much in months.

8. The American consumer is in trouble. Real disposable income is lower today than it was in 2008. The personal savings rate has fallen more than 70% since 1980. Average hourly earnings of production and non-supervisory employees have crashed 50% since 2008. (Source for all data in list: Federal Reserve Bank of St. Louis.)

What do we really have? We have a stock market bubble created by the “too easy” money polices of the Federal Reserve—policies of multiyear artificially low interest rates and $2.5 trillion in newly created (printed) money.

What He Said:

“Why Google stock will go higher: Most investors in Google, surprisingly, are retail investors. And that’s why the stock can go higher—because only 20% of the stock is owned by institutions. If the institutions jump in and buy Google, the stock will certainly move higher.” Michael Lombardi in Profit Confidential, June 2, 2005. Michael recommended Google as a buy on June 2, 2005, when the stock was trading at $288.00. On November 5, 2007, when Google reached $700.00 per share, Michael advised his readers to sell their Google stock and to put the proceeds into gold-related investments. Coincidently, gold bullion was also trading at about $700.00 per ounce in November 2007. Michael’s message was to trade each $700.00 share of Google into $700.00 of gold because he saw gold as a much better investment at that time.

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