I don’t know if you’re a Seinfeld fan like me. But one of my favorite episodes of all time was “The Bizarro Jerry.” In that 1996 show, Jerry Seinfeld and the rest of his friends meet versions of themselves that are completely opposites in terms of personality and behavior. What they do makes no sense in the real world!
I bring this up because today’s stock market is almost like a Bizarro version of itself. The economic fundamentals simply aren’t that good, like I told you last week.
Moreover, the jobs report that came out AFTER that piece was published only confirmed the weakening trend! Our economy created a pathetic 88,000 jobs in March, the fewest in nine months. Average hourly earnings stagnated, while retail and factory employment dropped. And the percentage of Americans participating in the labor force plunged to its lowest since May 1979.
As for corporate earnings, Thomson Reuters data shows that analysts expect just a 1.6 percent rise in the first quarter. That’s a huge decline from 6.2 percent a quarter prior. Negative pre-announcements from companies were also recently outpacing positive revisions by a pace of 108-to-23. That’s the worst ratio in 12 years!
Yet the stock market hasn’t even skipped a beat, as I’m sure you’ve noticed. So what gives?
It’s All about the Monetary Madmen!
Federal Reserve Chairman Ben Bernanke. European Central Bank head Mario Draghi. The folks at the Bank of England and, to a lesser extent, those in other parts of Asia and South America. They’ve been THE DRIVING FORCE for the markets lately. Earnings, economic data, and so on just haven’t mattered.
Just look at the post-jobs report market reaction. Stocks logically tanked for a couple hours. But then they floated higher once again — setting a new high a few days later. The catalyst? Yet another orgy of money printing, this time in Japan!
|Japanese government bonds have tanked as a result of the BOJ’s record-breaking money printing.|
Specifically, the Bank of Japan under new governor Haruhiko Kuroda announced plans to buy 7.5 TRILLION yen a month in Japanese government bonds. That was far above expectations, and will double the country’s monetary base in the next two years. It’s also going to buy everything from ETFs to REITs.
The BOJ’s move makes even our Fed look tame by comparison. That’s because its roughly $1.4 trillion injection of money over two years is being applied to an economy one-third the size of ours, making it even bigger as a percentage of GDP.
Ever since talk of aggressive new Japanese plans surfaced late last year, the Japanese yen has tanked. That has caused export-sensitive Japanese stocks and the Japanese market to surge.
We’re also seeing massive amounts of money flee Japan entirely as domestic savers and investors do their best to protect their wealth from the destructive policies of that country’s central bankers. That flow of funds is helping jack up the price of everything from European bonds to U.S. stocks, regardless of any fundamentals … in any market … anywhere!
Sooooooo … When Does the Madness End?
Watch Bonds — Especially in Japan!
If there’s one thing I’ve learned over the years, it’s that unsustainable trends driven by reckless monetary policy will inevitably fail. The real world will eventually matter. It did with the dot-bombs. It did with the housing bubble. And it will again.
In fact, something very interesting is starting to happen. Instead of BOOSTING Japanese government bond (JGB) prices, the BOJ’s massive bond buying program over there has caused them to tank!
Not only that, but volatility has exploded. Trading in the gigantic bond market over there had to be halted several times due to huge intraday price swings in JGB prices. Talk about the unintended consequences of highly reckless and experimental monetary policy!
This chart of the Power Shares DB 3X Inverse Japanese Government Bond Futures ETN (JGBD) says it all. You can see that this exchange traded note, which is designed to rise in value when JGB prices fall, just had its biggest four-day move higher on record, exploding to the highest level in a year!
Famed hedge fund manager Kyle Bass believes this may be the beginning of the end for Japan’s bond market. Billionaire investor George Soros, for his part, believes the yen rout could turn into an avalanche as a result of the BOJ’s actions, with potentially dangerous consequences.
I’m closely watching what is going on over there. If this sell off gathers even more steam, it will have implications for money printing escapades here in the U.S. and in Europe.
In the meantime, the volatility is yet another reason why I’d rather NOT own most government bonds. Instead, I am continuing to focus on high-quality stocks and ETFs in sectors that can BENEFIT from this massive round of money printing, without NEEDING it to survive and thrive.
Many of the names I’ve mentioned in a variety of venues are working great, with double-digit profits piling up, and I expect that to continue. In fact, I’ll have much more to say about that in the coming weeks so do stay tuned!
Until next time,