Investors need to recognize the risks the central planners are taking in their policies. The market didn't act poorly leading up to January, yet it had a decent sized correction. Don't let the market action lull you to sleep now. The risks are still more prominent than ever. I think most investors are aware of the potential problems the exponential increase in the Fed's balance sheet and the ZIRP policy can cause. However, I think investors are not positioned for this risk bearing out because they don't see any negative ramifications on the way in the medium term.
The market is has not crashed obviously, but there are glaring negative signs investors should be aware of. I will go over them briefly in this post. It is worth repeating that the market has had no returns in the past 17 months because it is easy to get swept up in a rally that has lasted a few weeks. Don't get the feeling the market is impenetrable.
The first chart is the average German bond. While part of the yield curve has been negative for a while, today for the first time, the average German bond has gone negative. This is not a good sign. It is quite amazing to look at a chart which goes back to the 1970s showing record lows. This will cause problems as insurance companies and governments need to make a return to pay off their expenses. A zero return world also may mean zero growth as it seems the global economy is headed in that direction.
The lead innovators for this low interest rate central bank policy are the planners in Japan. They give us a glimpse into what may happen to America in the future. Japan is in worse shape than America because of its disastrous demographic situation. This could be America's fate in a few decades, but for now we must focus on the Japanese monetary policy. The negative rate policy is supposed to weaken the yen and strengthen the Nikkei. As you can see from the charts below, the reverse has occurred. This is a problem because it shows market participants don't believe in the JCB anymore.
Clearly the Federal Reserve's policies of Quantitative Easing and zero interest rates have not helped the economy as this has been a weak recovery which has given us about 2% GDP growth per year. The recovery is so weak the Fed can't even raise rates 7 years into the recovery. But at the very least, what we could count on easy money policies to do is boost the equities market. If negative rates can't even weaken the yen and boost the Nikkei, it likely means it won't be a success if the Fed does it. This leaves the Fed with no wiggle room to respond to the rolling over of the business cycle which appears to be happening this year.
The chart above may begin to include America in 2016. The countries listed don't have burgeoning economies, so it looks as if the same result will happen to America.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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