I continue to expect a generally pleasing environment for stocks this year. However, the environment is a manufactured one, a courtesy of the mushroom-smoking Fed, election cycle spending excess, and truly unseasonably warm weather. On the surface then, things look quite fine, but underneath, the dry rot is spreading, much like I have expensively found with my pool deck down here in aircraft-carrier-like, smoking-hot Key West.
It’s Alice in Wonderland Time
The Fed now tells us that it will keep interest rates low for years, thus maneuvering to control both the price and the quantity of money. Something indeed is being smoked here, and like the song says, “Go ask Alice when she’s ten-feet tall.” In my musical analogy, Alice’s height today equates to the future rate of inflation. The interventionist Fed has created a distorted illusion of prosperity. As the Federal Reserve authorities rap on about QE1, QE2, et al., you intuitively know you are being had. But it’s hard to believe as the speculative bubble in the stock market continues to expand and employment appears to be in a strong groove. It’s a real head scratcher.
Yup, the bad stuff in the stock market is going up and the good stuff is going down, or simply wallowing. What a nightmare environment. Just wait until the Fed’s mushroom-induced high wears off. To get any type of yield today, investors are being forced out the yield curve or into the foulest sectors of the stock market. I have seen all of this before, and an interventionist Fed always ends up wearing the black hat. In recent months, the administration has been crowing about a rebound in employment without telling you that construction crews coming out unseasonably early are fueling a lot of the momentum.
A “Sort Of” Rebound
During the employment deflation of 2008 and 2009, non-farm payrolls were shrinking by as much as 0.3%, 0.4%, 0.5%, and 0.6% per month. In just late 2008 and the first three quarters of 2009, over seven million jobs went down the tubes. Now about our “sort of” economic rebound: There has not been a single monthly employment uptick of 0.5% or 0.6%. Not one!
In fact, in this lame recovery, there has not been a 0.3% monthly uptick. I keep laser-like focus on these numbers. The best monthly uptick in the “sort of” economic rebound came back in May 2010 with one lonely 0.4% aberration, quickly neutralized with a downtick the very next month. The net-net here is a gain of 3.4 million jobs over the last two years versus a loss of 7.5 million jobs in the prior period outlined above. There have been only half as many job gains in today’s period of supposed economic strength, as lost at the end of the financial meltdown.
The New Home Sales Disaster
Beginning to get the picture? A bona-fide sound economic recovery is underpinned by a non-interventionist Fed; a tax-cutting, budget-balancing administration; and associated strong gains in both the housing and employment sectors.
As I have explained, despite white-hot money creation, we have the most modest employment gains. As to the administration, forget it. And housing? Scary. I just read that the gap between the median price for new homes and “old” homes is a whopping $76,000, and that difference is up a staggering 57% from 2010.
The reason, of course, is a monster backlog of cheap, foreclosed old homes. Americans are simply packing up, putting the key in the door, and splitting, leaving banks around the country to choke on piles of upside-down mortgages. Whole communities quickly become weed-infested rattraps. Check out my down-sloping chart line on new home sales. Like that depressing downside momentum?
And this comes on the heels of a tidal wave of bank credit expansion. Who in his right mind would buy a new home in this market, especially a new home with a phony adjustable rate mortgage? In February, the median price for a new home was about $233,700, versus only $157,000 for an old home. See any problem with these numbers?
Now what? First, thanks to the Fed, America is clearly not in recession. Since last April, there has been but one monthly decline in the Conference Board’s leading indicators.
Secular Swing #3 on the Way
In my nearly five decades in this business, there have been two secular swings in interest rates. Just two. Now number three is on the way.
Can you guess the direction? It’s a little hard to have a secular downswing off a zero base, is it not?
Yes, after the Fed puts the mushrooms away, Alice will shrink. Reality will return. The reality for interest rates will be a nasty stair-step run up. How do you reckon a big increase in interest rates will affect bond prices, the real estate market, the economy and the stock market? Not so good.
In the coming debacle, you will want the financial equivalent of a shotgun in your defensive arsenal, not a pea shooter.