The Fed’s Answer to the Ghastly Monster of its Creation

The launch angle of the U.S. stock market over the past decade has been steep and relentless.  The S&P 500, after bottoming out at 666 on March 6, 2009, has rocketed up over 370 percent.  New highs continue to be reached practically every day.

Over this stretch, many investors have been conditioned to believe the stock market only goes up.  That blindly pumping money into an S&P 500 ETF is the key to investment riches.  In good time, this conditioning will be recalibrated with a rude awakening.  You can count on it.

In the interim, the bull market may continue a bit longer…or it may not.  But, to be clear, after a 370 percent run-up, buying the S&P 500 represents a speculation on price.  A gamble that the launch angle furthers its steep trajectory.  Here’s why…

Over the past decade, the U.S. economy, as measured by nominal gross domestic product (GDP), has increased about 50 percent.  This plots a GDP launch angle that is underwhelming when compared to the S&P 500.  Corporate earnings have fallen far short of share prices. Continue reading

Posted in MN Gordon, Politics | Tagged , , , , | 14 Comments

Japan’s Yield Curve Control Regime is Coming to America

Earlier this month, Bank of Japan (BOJ) Governor Haruhiko Kuroda commented that Japan’s central planners are considering a 50-year government bond issue as a long-term means of putting a floor under super-long interest rates.  How this floor would be placed is extremely suspect; we’ll have more on this in a moment.  But first, the dual benefits – according to Japan’s central planners…

One, the 50-year government bond would allow the government to lock in cheap long-term funding.  Two, it would give yield-starved investors higher returns.  Cheap funding.  Higher yield.  What’s not to like?

Kuroda, if you didn’t know, is a certifiable madman.  Following a cheap credit induced bubble and subsequent bust of Japan’s property and stock market in the late-1980s, Kuroda and his cohorts at the BOJ have tried anything and everything to re-inflate asset prices.  After nearly three decades they’re still at it.

There’s not a deranged monetary policy idea the BOJ hasn’t pioneered in the name of saving the nation from itself. Continue reading

Posted in Government Debt, MN Gordon | Tagged , , , , | 1 Comment

Is the Fed Secretly Bailing Out a Major Bank?

The promise of something for nothing is always an enticing proposition.  Who doesn’t want roses without thorns, rainbows without rain, and salvation without repentance?  So, too, who doesn’t want a few extra basis points of yield above the 10-year Treasury note at no added risk?

Thus, smart fellows get after it; pursuing financial innovation with unyielding devotion.  The underlying philosophy, as we understand it, is that if risk is spread thin enough it magically disappears.  In other words, the solution to pollution is dilution.

With this objective, new financial products are fabricated into existence.  The risk free reward of several extra basis points are then packaged up into debt instruments and sold off to pension funds and institutional investors.  The search for yield demands it.

Yet as an economic expansion progresses, especially one that has been extended and distorted with the Fed’s cheap credit, these derived financial securities are polluted with more and more toxic waste.  Spreading the risk ultimately pollutes the entire pool of liquidity. Continue reading

Posted in Economy, MN Gordon | Tagged , , , , | 4 Comments

Riding the Type 3 Mega Market Melt Up Train

The decade long bull market run, aside from making everyone ridiculously rich, has opened up a new array of competencies.  The proliferation of ETFs, for instance, has precipitated a heyday for the ETF Analyst.  So, too, blind faith in data has prompted the rise of Psychic Quants…who see the future by modeling the past.

For the big financial outfits, optimizing systematic – preprogrammed – delta hedges is an essential aptitude of the 21st century.  Our guess is that many of today’s high flyers will crash and burn during the next bear market.  But what do we know?

As far as we can tell, the stock market, circa November 2019, is an absolute fantasy.  The Dow Jones Industrial Average (DJIA), S&P 500, and Nasdaq have little connection to the underlying economy.  Rain or shine, they go up.

Market watchers, eager to explain the fantasy, employ creative nomenclature as they attempt to classify the state of the stock market with discerning acumen.  Is it a bubble?  Is it a melt up?  If it’s a melt up, what type and gradation is it? Continue reading

Posted in MN Gordon, Stock Market | Tagged , , , , | 2 Comments