I’m not a portfolio adviser, but I think there needs to be some perspective offered on what stocks and bonds did at the end of this week.
- The Dow Jones index rose 2.8% or 480 points on Thursday and Friday.
- The S&P 500 index gained 2.2% or 44 points over those two days.
- The Nasdaq soared 4% or 192 points the last two days of the week.
- US ten-year bond prices fell as yield went from 2.01% to 2.08 rate to close on Friday.
With moves like this you would think prosperity has turned the corner and is throwing money and jobs to everyone on the street. The US dollar strengthen over the same time frame.
However, none of what I wrote about the US economy is true. The run up in stocks and bond yields is predicated on currency wars.
On Thursday ECB chief Mario Draghi — formerly head of Goldman Sach’s Italian operations — told the markets that due to weakness in the euro zone the central bank would more than likely increase its version of quantitative easing in December at its next meeting.
On Friday the Chinese central bank cut its key interest rate by a 0.25% citing weakening economic growth and to combat a stronger yuan.
Neither of two events suggest that the global economy is doing well. In fact two of America’s largest trading partners said they are in trouble.
So why do we have such a move to the upside in the markets?
The world will be awash in new money coming from central banks. This new money will find its way into the markets (but not into your pockets through increased wages), so get in now before the run up. It’s a fresh bag of heroin for the addict markets.
To give some credence to the slowing global economy crude oil fell more than $2.00 a barrel on the central bankers words and actions.
Now of course this doesn’t end well, but who knows when it would end. Suffice it to say the Fed will not be raising rates in this environment anytime soon, since all indications are that we are about to import more recessionary inputs as Europe and Asia slows and South American economies crater.
All the BRICs — with possible exception of India — are swimming just like a brick, straight to the bottom. And the only way to hope to stay afloat is to cheapen their currencies against the dollar.
So the recent market rise is based on the premise that fresh money from overseas is coming, since again the US is the cleanest dirty shirt in the pile, but for how long?