Federal Reserve policy has been credited often with pushing up stock prices, but one research firm believes the central bank has pushed all asset prices to extreme levels.
“We think investors with a longer-term outlook should tread carefully in financial markets,” TrimTabs said in its widely followed weekly market analysis. “TheFederal Reserve and its fellow central banks have succeeded in making almost every major asset class in the world overpriced.”
While the S&P 500 has climbed more than 15 percent year-to-date, other risk assets have surged as well, while the Fed has expanded its balance sheet past $3.4 trillion in efforts to spur growth.
TrimTabs cites a few: Global junk bond issuance (a record $254 billion through May); house flipping in California, which a recent Wall Street Journal reportpegged at its fastest pace since 2005; and the increased creation of collateralized debt obligations, the instruments that helped create the financial crisis. They are around pre-crisis levels.
Charles Gave Warns: “Should The Fed Lose Control, The Downside Move In Markets May Be Terrifying“
Charles Gave of GaveKal has a fascinating summary of where the nearly five-year long experiment in central-planning has taken the US, and by implication, global economy. To wit:
What kind of failure?
By propping up asset markets, the Fed has created an illusion that wealth is being created. The next step, according to Bernanke’s plan, should be for growth to follow. In fact, there is no reason why the rise in prices of financial assets should lead to actual investments or a rise in the median income. So far, it has not. There has been no real increase in the private sector propensity to borrow, and the danger may be that any further public sector borrowing will hasten the decline because of our “permanent asset hypothesis”.
This means that, should the Fed lose control of asset prices (is this what is now happening in Japan?), then the game will be up and the downside move in markets may well be terrifying. Most at risk would be low and medium quality credits, banks, commodity producers, and any companies with negative cash-flow.
It is obvious, then, that if Bernanke’s experiment fails, it will be a profoundly deflationary failure. The best hedges in a deflation and in financial panic are US long bonds and the US dollar. Renminbi bonds seem also to be developing safe-harbor status. In fact, we found it interesting how, in May, every bond market around the world sold-off, except for the RMB bond market.
No Picnic for U.S & Emerging market Bonds if this happens!
CLICK ON CHART TO ENLARGE
Aggregate Bond ETF (AGG) and Emerging Markets Bond ETF (EMB) have declined rather sharply of late. The declines has taken each of them down to multi-year support lines at (1) in the charts above. This 2-pack reflects that interest rates all over the world are rising and causing bond prices to decline!
It would be “NO PICNIC” for long bond holders if these support lines would break, because the next key support is well below current levels!
It’s time to panic about Treasurys
Grantham Says Assets ‘Brutally Overpriced’ on Fed Policy
Jeremy Grantham, chief investment strategist at Grantham Mayo Van Otterloo & Co., said global asset prices have climbed too high because of the U.S. Federal Reserve’s expansive monetary policy.
“All global asset assets are once again becoming overpriced,” Grantham wrote in a quarterly letter released today. U.S. companies, other than “quality” stocks with stable earnings and low debt, and most global growth equities, are “brutally overpriced,” Grantham wrote.
The Smoke And Mirrors Are Running Out
Those who believe the economy is recovering are ignorant of the facts. Other than the Great Depression no US recovery (and I don’t believe we are in a recovery) taken longer. Eventually it may take more than a decade like the 1930s. Or perhaps it will be like Japan which is in its third decade of “recovery.”
Politics and Economics
The truth is that our economy is spent, exhausted and filled with misallocations and distortions made much worse by government interventions. There is no recovery, nor will there be one until a massive purge (usually referred to as a depression) occurs. This event will result in bankruptcies that release scarce, misallocated physical capital from unproductive and unwanted areas to places where it is needed and can be utilized efficiently.