Politicians and central bankers are desperately trying to convince investors that the economy has returned to what they deem as a “pre-crisis normalityâ€. But the truth is the global economy has never been in a more fragile condition. In an example of just how precarious the Fed-engineered asset bubbles have become, all of the 2014 U.S. equity market gains were wiped out by just a few really bad trading days in October.
That’s correct, the Dow Jones, S&P 500 and the NADAQ averages were all negative after the first 10 months of last year. Investors were better off sitting on the sidelines in cash, waiting for the better entry point that appeared in mid-October. The so described strength of markets and the economy is completely illusory.
Investors need to strategically allocate their portfolios for volatility like we’ve never seen before, because government manipulations of formerly-free markets have caused equities to repeatedly lose half their value. That’s what happened in 2000 and in 2008-’09. We are due for just such another crash in the very near future. The investing rollercoaster ride that results from the building and busting of asset bubbles is becoming more extreme as central bank intervention grows ever more intrusive.
We have now reached the point where central banks can never stop buying bonds because they cannot risk the normalization of interest rates. The best example of this is Japan. Allowing interest rates to mean revert would now cause nearly all of Japanese government revenue to be used for debt service. Once a market becomes aware that all of a nation’s revenue must be used to pay interest on current outstanding debt, it becomes a mathematical certainty that it must default on the principal. This condition has always led to a currency, bond, equity and economic crises.
Throughout economic history this has only really occurred in isolation, and/or in small banana republics. However, presently most major economies face the same fate concurrently. Japan, China, Europe and the United States cannot allow rates to rise…ever.
