Weekly Article 09-20-2017
I am writing this in the morning before a Fed announcement this afternoon. If there are any surprises I will do a short update later. As I have said before I believe these “announcements” are far more important than they should be. If free markets were allowed to function and not be “managed” by the few in charge the markets would determine prices and the absurd nature of the markets these days could have never happened.
Unfortunately, it appears we are so far down the road if the central banks take their foot off of the pedal the entire economic experiment could come to an abrupt end. I have written many times in the past that all of this market manipulation- whether it be buying stocks, bonds or real estate- each action needs to be bigger to get the same effect. Keep in mind when our Federal Reserve set out to “save the world” in 2008 QE was $65 billion a month- globally. (So they say- there’s really no way to say for sure). Just a few days ago it was disclosed that the global central banks have already done over $2 Trillion in asset purchases in just 8 months. So far that would be $250 billion per month in 2017.
I believe that $250 billion per month is likely the main reason why stocks, bonds and real estate continue higher even though all of the economic numbers are stagnant at best.
You may think I don’t read headlines. Just last week it was reported by the Census bureau that median income was the highest ever in the US. It finally was higher than the median income was in 1999. Even if the number was real it would still be pathetic because expenses have risen exponentially since then. However, the census bureau admits that the numbers are not figured the same way. Sound familiar- just like the unemployment rate? In 1999 there was no calculation for withdrawals from qualified accounts, bank accounts, etc. BANG! Now they count. Funny but if I have an asset and I make a withdrawal I believe I am liquidating a portion of that asset- likely from PRIOR years earnings-not creating new income which is what this report suggests.
Some new jobs were actually created- by the census bureau- to figure out how to make these numbers appear higher.
As with virtually all of the economic reporting, it appears facts take a back seat to the narrative. How can the economy be doing great- as they say- if incomes aren’t up, unemployment is high and expenses are rising. Of course, the Fed believes there is not enough inflation. Translation: Prices are not high enough- we want them higher. When you go to shop for something- do you want the price higher?
No inflation? Don’t tell that to my bank account as the prices for education, healthcare, insurance, taxes, fees, etc. continue to climb in a meaningful way. Too bad incomes are not following suit. Of course dead low interest rates allow for people to finance at lower rates to at least stem some of the damage and allow the narrative to continue.
On and on we go deeper into economic fantasyland where the cliff that we are likely approaching is getting higher and higher. Those who think that there are no consequences to all of this should take a look at history. In the USSR (Old Soviet Union) the economic reports were glowing up until reality bit and the entire economy imploded. Of course, many on Main Street were probably well aware of the true situation just by looking around. Those who don’t know history are more likely to repeat it.
For those who are getting impatient for this to play out- join the club. Actually, it will not likely be a good day for anyone if reality rears its ugly head here in the USA and most of the developed world.
Many will say “you have been saying this for years”. Yes I have. Too bad I didn’t see negative interest rates as a possible policy tool. I didn’t expect that entities would create contracts out of thin air- like our “leaders” do with dollars, Yen, Euros, etc. to sell paper gold contracts into the market and cause trading machines to sell and lower the paper price of gold. I didn’t envision central bank balance sheets going from $7 trillion in 2008 (when they should have learned their lesson) to over $22 Trillion today.
As I say many times- if I sat here 5 years ago and just mentioned what has taken place in the last 5 years you would have not walked out but RUN out of my office thinking I was nuts.
The fact of the matter is that we are in uncharted waters. Never in recorded history has there been so much debt. There has never been a time where all of this debt has been unpayable but appears that it may be sustainable if the central banks just “print” some more.
Too bad that with every keystroke central banks are buying up assets that we in the real world need to live. The Japanese Central bank owns over 75% of all Japan ETFs. They are a top 10% holder in 80% of the Nikkei index- that was more than 6 months ago- it is likely more now. They are purchasing real stuff with nothing more than an illusion. We all would if we could –I’m sure- its human nature.
The ECB is funding Merger and Acquisition transactions with 0% loans. Swiss Central Bank has $85 billion in equities and is the largest shareholder of Apple stock. There is plenty more but you get the picture.
Don’t ever forget that on our first currency here in the USA Benjamin Franklin actually inscribed on the note “To Counterfeit is to Die”. I guess he actually understood that there is never something for nothing.
Like I’ve said before I don’t believe it will matter much “when” reality bites. I just believe it will.
Does your asset allocation need an update?
Mike Savage, Financial Advisor
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