Welcome to the Era of Targeted Bailouts

Posted on July 7, 2023 by MN Gordon

One of the consequences of a speculative mania is that it distorts the relationship between financial markets and the underlying economy.  As the broad stock market index inflates it disconnects from the underlying economy.  S&P 500 index funds become speculative instruments.

Over nearly four decades, certain choices and preferences were penalized by the Federal Reserve’s financial engineering games.  Namely, hard work, diligent saving, and paying one’s way.  These virtues were repeatedly punished with exacting deception.

For example, the 10-Year Treasury rate peaked at over 15 percent in September 1981.  Over the next 39 years, the crafty wizards at the Fed contrived a world of declining interest rates.  The Fed put, which involves slashing interest rates whenever there’s a 20 percent decline in the S&P 500, could be counted on to bailout stock and bond market investors.

This centrally coordinated intervention had a twofold effect of observable market distortions.  First, the burst of liquidity puts an elevated floor under how far the stock market falls – the put option effect.  Second, the interest rate cuts inflate bond prices, as bond prices move inverse to interest rates. Continue reading →

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Are You Gambling with Your Retirement Account?

Posted on June 30, 2023 by MN Gordon

And just like that.  The year is half over.  Can you believe it?

Hardly the blink of an eye ago we were putting the final touches on our one great big nasty prediction for 2023 – that China will invade Taiwan.

Of course, this hasn’t come true – yet.  And, quite frankly, we hope it doggone never does.  But with fools like Anthony Blinken in charge, the unthinkable could become a reality.

Certainly, the stock market, as measured by the S&P 500, has performed well.  As of market close on Thursday (June 29), the S&P 500 is up 14.51 percent year-to-date.  Not bad.

But the real action is over in the technology sector.  Year-to-date, the NASDAQ is up 29.86 percent.  Did you capitalize on it?

If not, you may still have a good shot at easy stock market returns over the next six months.  That’s what research by Thomas Lee, founder of Fundstrat Global Advisors, says. Continue reading →

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Washington’s Bias for Continuous Inflationism

Posted on June 23, 2023 by MN Gordon

This week Federal Reserve Chair Jerome Powell delivered his semiannual testimony to Congress.  A main feature of the discussion was the status of rate hikes and the fight against inflation.

In short, Powell’s inflation fight isn’t over.

Core CPI, which excludes food and fuel prices, is increasing at an annual rate of 5.3 percent.  Similarly, core personal consumption expenditure (PCE) prices are up 4.7 percent from a year ago.

Thus, a federal funds rate of 5.25 percent isn’t enough to contain rising prices.  Ideally, a rate on the order of 7 to 7.25 percent is needed to do the trick.

After its recent FOMC meeting, the Fed signaled two additional rate hikes this year.  As part of this week’s testimony, Powell validated this… remarking it was a “pretty good guess”.

So, why pause in the first place?

The Silicon Valley Bank and First Republic Bank fiascos in March are a very small part of a much larger issue.  Rapid interest rate hikes have left poorly prepared banks unable to adequately compensate depositors. Continue reading →

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Are You Unknowingly in the Impact Zone?

Posted on June 16, 2023 by MN Gordon

“When the wave breaks here.  Don’t be there.  Or you’re gonna get drilled!” – Turtle

A New Bull Market?

Have U.S. stocks really entered a new bull market?

That’s the claim of some experts following the S&P 500’s recent attainment of a 20 percent increase from its October 2022 interim low.  We have some reservations.

Of note, the S&P 500 is still down over 7 percent from its all-time closing high reached on December 29, 2021.  Certainly, the S&P 500 could hit a new high as part of this rally.  But it would be short-lived.

There are a number of factors at play that are bearish for the stock market.  Interest rates, Treasury sales, credit market stresses, and an imminent recession.

In fact, we believe the S&P 500 has become increasingly risky over the last six months as the top technology stocks have bubbled up.  Because of this, the portfolios of many investors are now unknowingly in the impact zone.  And they will get absolutely drilled when the market resumes its next bear market leg down.

We’ll get to the how and why of this in just a moment.  But first, some context is in order.

This week’s Bureau of Labor Statistics consumer price index (CPI) report is as good a place as any to look at first.  As you may have seen, the BLS reported that consumer price inflation, as measured by the CPI, increased at an annual rate of 4 percent in May.  That’s more than double the Fed’s arbitrary 2-percent inflation target. Continue reading →

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