From the desk of Will Bonner:
Dear Diary Reader,
Dad is offline today. He’s on the family ranch in northwestern Argentina. And Internet access is spotty. (The ranch is extremely remote, and the connection is via satellite.)
So, we have another classic from the archives for you today – an important warning about the current rally in US stocks.
And a recommendation: Now is a good time to take profits.
Time to Take Your Money Out of US Stocks
Nihilo ex nihilo fit. Out of nothing, nothing comes.
First put forward by ancient Greek philosopher Parmenides in the 5th century BC, Thomas Aquinas and St. Augustine later used this axiom to prove that the universe needed a “first mover,” to get things going.
Even if the whole thing began with some kind of “Big Bang” moment, it still needed a banger to bang it.
Who? God, of course.
We don’t know. But our jaw dropped when we saw how the bangers over at the Federal Reserve have helped add $20 trillion in US household wealth since 2009 – setting yet another new record. The Wall Street Journal reports:
Americans’ wealth hit the highest level ever last year, according to data releasedThursday, reflecting a surge in the value of stocks and homes that has boosted the most affluent US households.
The net worth of US households and nonprofit institutions rose by $10 trillion in 2013 to more than $80 trillion.
Ex nihilo? Who cares. It’s there. It’s spendable.
And yet… what kind of wealth comes from nothing? Is it solid and real, like the earth, the moon and the stars? Or is it something else?
It is clearly something else. But what?
The Great Fed Wealth Transfer
Let’s begin by looking at where all that new wealth comes from. Not from the hand of the Almighty, of course…
We are led to believe that the Fed’s policies are designed to produce a general prosperity; the Fed keeps rates near zero so the entire economy benefits.
But it isn’t true. Only some prosper. Even the headline in the WSJ says so: “US Wealth Rises, But Not All Benefit.”
The Fed’s activist policies distort and corrupt the economy. First, prices are bent. Then, taking their cues from bad prices, bad decisions are made. Before you know it, everything is twisted in one direction or another.
The Fed is largely to blame for the dinosaur houses we see all over the US. Low rates and rising prices tricked Americans into believing that the more house you had the more money you would make.
Factories in China can also trace their genesis to the Fed’s low-down interest-rate policy. Americans were lured to borrow and spend; Chinese manufacturers benefited.
Record high earnings, record high margin accounts, record high junk bond issuance, record household wealth gains – all are products of Fed policies.
We quote from the book Paper Money Collapse: The Folly of Elastic Money and the Coming Monetary Breakdown. The author, Austrian School economist and former Wall Streeter Detlev Schlichter, was kind enough to send us an advance copy. Says Schlichter,
[The financial authorities] can never enhance all economic activity evenly or‘stimulate‘ the economy in some all-encompassing, general way. Every injection of new money must lead to changes in resources used, to a redirection of economic activity from some areas to others and change income and wealth distribution. Inflows of new money inevitably change the economy and must create winners and losers.
That $20 trillion extra is in the hands of America’s winners. It is not real new wealth. It added little to US GDP… or to Americans’ incomes. It was merely a transfer of wealth. Owners of stocks and houses got richer. Wage earners and savers got poorer.
Take Your Money Off the Table
We have some advice for those on the receiving end of the stock market bonanza: Take your money off the table before it disappears.
After all, it is only a claim on wealth, not wealth itself. And that claim will expire worthless when the Fed changes its policies. The Fed giveth, and the Fed taketh away.
Either the Fed will taper… ending the bonanza. Or it will lose control of interest rates. And when they rise, all the broken records we have been citing become like broken bottles in a street fight. Somebody is gonna get hurt.
For the moment, the 12 members of the policy-setting Federal Open Market Committee are more powerful than God. Since the beginning of the universe, it took about 13,798,000,000 years for the market value of all the world’s assets to reach $20 trillion. The Fed’s “Big Bang” accomplished the same trick in only six years – start to finish.
That does it for us. No more worshipping a guy who has been dead for 2,000 years… or his dad, for that matter. In this Lenten Season, we bow to no man. But as for the lady who runs the Fed, the entire economy bends in whatever direction She commands.
How to Prepare for the Next Credit Bust
From the desk of Chris Hunter, Editor-in-Chief, Bonner & Partners
Every aggressive credit easing cycle by the Fed blows up a bubble somewhere.
There was the bubble in US real estate in the late 1980s… a bubble in tech stocks in the 1990s… and an even bigger bubble in US real estate in the mid-2000s.
Today, the bubble is in yield.
QE and ZIRP have brought the so-called “risk free” rate – the rate of return on supposedly risk-free Treasury bonds – down to ultra low levels.
This has forced investors to search for yield elsewhere. Responding to the Fed’s strong-arming, they have put their money into higher-yielding S&P 500 sectors… into higher-yielding emerging market bonds… and into higher-yielding junk bonds.
All of these investments make sense, in relative terms, in a low-inflation world. That’s because as long as consumer price inflation remains low, the Fed is likely to keep suppressing yields on Treasury paper… making alternatives more attractive.
The problem is consumer price inflation – running at a mere 1.1% over the last 12 months – is not the only kind of inflation in today’s economy. There’s plenty of inflation to be found in US stock prices, too… and just about any kind of bond that gives investors a decent yield.
Of course, investors who believe in the power of central banks to ‘fix’ the economy (and market prices) aren’t worried. The last five years of rallying stock and bond prices tell them they were right to be so sanguine about the potential risks.
But just as investors perceive less risk, risk is building up.
As legendary fund manager Jeremy Grantham, of GMO, put it recently:
The next bust will be unlike any other because the Fed and other central banks around the world have taken on all this leverage that was out there and put it on their balance sheets. We have never had this before. Assets are overpriced generally. They will become cheap again. That’s how we will pay for this. It’s going to be very painful for investors.
Our advice remains the same: Don’t over bet on the highly distorted US stock market. Limit your exposure to bonds. And keep onboard plenty of cash and gold as hedges.
These simple steps will help protect your wealth from the coming bust.