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We now live in a boom/bust era dictated by Fed policy. It is strange to me that people assume that the Federal Reserve and a group of economists can control the economy with any sort of precision. Sadly, this 30 year experiment with central bank interventionist policies makes the investment world a very dangerous place.

Something on a tectonic scale is happening in the markets these days. First we get a huge selloff in gold/silver/commodities that started last Friday afternoon April 19th and spilled over into Monday. Now, this morning, as I sit in front of my screens at 3 a.m., I watch as the German DAX and French CAC plunge from both being up 0.7% to down 1.75% on big volume and no news. Just as the SP500 was down big on Monday, then rebounded Tuesday, it too now looks weak. This is NOT how markets generally behave and it troubles me greatly.

Wall Street games are par for the course as they move the herd of retail investors from one idea to the next, almost always being on the other side of the trade themselves. They tell the public to buy when they need to sell and vice versa. At the same time, Congress quietly and conveniently makes sure that insider trading rules meant to go into effect this month won't and the Fed accidentally releases their much anticipated FOMC minutes 24 hours early to Wall Street banks and Congressional lobbyists. This morning I see this story hits the wires.

The state of our markets and financial institutions is troubling to say the least. And trying to navigate these murky waters as an investment professional is difficult enough without this extra layer of manipulation. The things I saw while on the trading floor in 1987 were bad enough, but what goes on today, on such a global scale, is mind boggling. But, it's the world we live in and paying attention to the details is more important now that ever.

Let's just look at the gap between the rising U.S. stock market and the visible deceleration in the rate of global economic growth that has been widening over the past several weeks. I came into the year skeptical of the 'green shoots' healing economy story as it is the same one Wall Street has brought us each of the past 3 years. This year they've been able to add the 'all-time new highs' headline to the SP500 and Dow as they lure people back into the market, ignoring that inflation-adjusted these markets are no where near their highs. So, my cautious market view is growing more bearish.

The very notable weakness in the March ISM release, the big drop in consumer and small business confidence, disappointing March retail sales, a plunge in the Citigroup U.S. Surprise Index, worsening EU economies and falling European stock markets affirm that global growth is slowing. All this talk of an early Fed exit will soon, I believe, turn into calls for the Fed to print even more than the $85bln a month that they now print.

Some other recent evidence of the slowing global growth thesis include:

  • the intensification in the drop in commodity prices (copper and oil, in particular)
  • falling U.S. Treasury yields
  • falling transportation index (very economically sensitive, like copper and oil)
  • a near-record percentage in the number of companies issuing earnings warnings
  • many markets around the world are struggling (excluding for now the US and Japan)

I'll be candid; the past couple of years have been a challenge and test to my personal convictions and skills. I can't tell you how hard it is to maintain my ability to break away from the herd. Its human nature for people to look to their left and right to see what others are doing. We take comfort in the herd because it feels safer being surrounded by a like minded group. Most people take comfort that Bernanke, or Greenspan before him, are at the helm of the economy and will solve our problems and find the solutions needed. Sadly, what most fail to see is that these are the people that, together with Wall Street, created the problems. Think about this: if a drunk bus driver plunges his bus off the side of the road, but then drags a couple of passengers to safety, is he a hero? These same people that create the problems, never saw the coming impact from their actions are now going to lead us to safety? I doubt it.

I am not a gloom and doom person or an extremist, but an optimist who feels he can study the terrain and see the road ahead. But I will admit that even though I have been around the block enough times, and have been a student of the market for more than 27 years, I have never seen this set of circumstances come together as they are currently unfolding in the world financial markets. It's hard to really appreciate what is going on in the global financial arena. It's actually unprecedented:

  • globally, central bankers have printed almost $10 trillion in new money to keep their economies afloat
  • the Fed is monetizing $85 billion per month and is, in effect, buying 60% of all newly issued Treasuries and almost all of the mortgages written to finance this latest housing echo-bubble
  • the Bank of Japan is monetizing $75 billion per month in government bonds and will double - yes, double - their monetary base over the next two years (note that Japan's economy is 1/3 that of the US)
  • Japan has effectively devalued their currency in order to stimulate their economy, joining Switzerland, Venezuela and almost every other nation in the race to debase their currency
  • South Korea just unveiled a 19.3 trillion won (HK$135.1 billion) stimulus plan to support exporters under pressure from a weaker Japanese currency and revive an economy that grew last year at the slowest pace since 2009

Okay, so what's all this mean? In the shorter term, volatility rules as markets swing around and try to price in these global events. At the same time, big market players, push markets around because they can and because it's profitable to do so. For perspective, note that at the end of last month GLD's holdings were about $63 billion while the market capitalization of the SP500 was over $14 trillion. So you can see, pushing the gold market around is a whole lot easier for a big player than pushing around the stock market.

Gold has taken a beating, down $200 in two days. Is the bull market over? I don't think so for a variety of reasons. First and foremost is because, as outline above, money creation has now become globally acceptable. The fundamentals of debasing paper currencies should be supportive of the oldest currency in existence. History has shown that there has never been a successfully executed plan to print one's way to prosperity.

Second, I've never seen a bull market in the commodity world end with a peak like we had in gold in August 2011, which was a slow climb to $1900, and now 20 months of sideways to down consolidation. Typically, there is a blow-off peak where prices go almost parabolic before the bottom falls out (like the 2000 Internet bubble or housing in 2006 or mortgages in 2007). Instead, this feels like a typical bear raid where large sellers drive the price down to trigger stop-loss selling, which then pushes prices even lower. I've seen these many times and have been on the floor and part of them as well.

Be careful out there as things are about to get volatile I fear. The overall market is due for a correction while metals and commodities should turn and head higher.

Source: On The Cusp Of A Volatility Change