Clear And Present Danger!

The cycle since 2009 has been different from other market cycles in one significant manner. That having been said, it is the global central banks that have intentionally pushed interest rates to zero and below. This encouraged investors to speculate on the equity markets, which have now become dangerously overvalued, overbought, and “over bullish” – extremes according to all measures. In my opinion, this has deferred – and not eliminated – the disruptive unwinding of this speculative episode.

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They have encouraged an historic expansion of public and private debt burdens with equity market overvaluations that rivals only those of the 1929 and 2000 extremes on reliable valuation measures. The brazen experimental policies of central banks have amplified the sensitivity of the global financial markets to economic disruptions and distortions of value in relation to investor risk aversion.

It is very clear that a zero interest rate policy has encouraged yield-seeking speculation by investors. As I have previously discussed in many of my past articles, monetary easing in and of itself does not support the financial markets. Easy money merely stimulates speculation while investors are already inclined to embrace even more risk. The FED’s aggressive and persistent easing will fail to prevent this market collapse.

Any financial professional who has any understanding of how securities are priced should know that elevating the price that investors pay for financial securities does not increase aggregate wealth. Financial securities (stocks) are nothing but a claim to some future set of cash flows. The actual wealth is embroiled in those future cash flows and the value-added production that generates them. Every security that is issued MUST be held by someone until that security is retired. Therefore, elevating the current price that investors pay for a given set of future cash flows simply brings forward investment returns that would have otherwise been earned later on. The FED is leaving poorly compensated risk on the table for the future!

The total debt of the United States has reached gigantic proportions well beyond 2008.

The crisis ended in the second week of March of 2009, precisely when the Financial Accounting Standards Board (FASB) responded to congressional pressure and changed rule FAS157 so as to remove the requirement for banks and other financial institutions to mark their assets to market value. The mere stroke of a pen has eliminated any chance of widespread defaults by making balance sheets look financially stronger. The new balance sheets may be great in the short term, but, ultimately, have become weapons of mass destruction.

The Race To Debase Continues…

As of September 2nd, 2016, the BLSBS disappoints with a print of just 151,000 jobs. This will eliminate the possibility of a FED funds increase, however, do not be surprised if some FED officials emerge to tell you otherwise, as we are already experiencing some counter-intuitive moves within several of the markets.

The true unemployment rate is ACTUALLY U-6! Consequently, the U-6 rate more accurately reflects a natural, non-technical understanding of what it means to be unemployed. Including discouraged workers, underemployed workers, and other people who exist on the margins of the labor market, the U-6 rate provides a broad spectrum of the underutilization of labor within the country. In this sense, the U-6 rate is the TRUE unemployment rate, which is close to 10%.

U-6 Unemployment Rate
Unemployment Rate Chart

Concluding Thoughts:

In short, this incredible bull market in stocks, which we have embraced since 2009, is quickly nearing its end. The FED’s mass easy money policies, stock buyback programs, and accounting rule changes have simply masked/covered up most of the financial mess people, businesses, and global economies are in.

Eventually all these tactics to cover-up and kick the financial can down the road will start to fail. One they start failing, things will quickly get really ugly for the entire economy for those not knowing how to avoid and profit from market weakness.

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Chris Vermeulen

[Image Courtesy of Flickr]

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