The indices have entered a realm of pure fiction, soaring away from deteriorating economic fundamentals like the unleashed falcon in Yeats's "The Second Coming." As things fall apart, the drivers of endless euphoria are Central Banks flush with electronically created currency, that is, debt and indebtedness whose costs retail investors will bear. Another massive wealth consolidation event like the Goldman Sachs gold smash draws near. The March ISM Manufacturing was 51.3 down from 54.2, a more than 5% decline in a month. China's April PMI Manufacturing fell 2% from 51.6 to 50.6. Yet soaring equities draw everyone's eyes and lure dollars.
In Bloomberg April 24, Sarah Jones reported on a Royal Bank of Scotland (NYSE:RBS) survey of 60 Central Bankers who hold $11 trillion in foreign exchange reserves. 23% of them are buying equities and equity ETFs. The Swiss and Czech National Banks have raised their equity holdings to 10% of their reserves. The center will not hold in economies whose deflationary direction is masked by Central Bank buying, QE and POMO injections whose effect is less with each shot.
Like retail investors, Banks seek income through equities because of Sovereign QE-yield suppression, but debt creation helps banks balance books and leverage holdings while strangling fixed income investors. Thus indices rise not only despite but at the expense of the economy.
Central Banks also are buying gold (NYSEARCA:GLD) even as the recent flood of paper-trade short selling depleted Comex inventories. Comex gold holdings fell 33% in the past month while JP Morgan's (NYSE:JPM) commercial holdings fell 64% in a day as CB's and individuals bought at record levels as I documented in recent pieces here and here that sought to relate economic problems in the West to crashing bullion prices. Central Bank hard asset buying is at a 49-year crest. "They see it as a long-term holding, as an ultimate reserve currency," said Walter Hellwig at BB&T Wealth Management. This is notable because in the West, the narrative of Sovereigns and those allied with them is that gold is a bad investment: yet they buy while destroying their own currencies and positioning equity investors for wealth-destruction. One could say that bullion was smashed so Sovereigns could buy cheap. This is the act of a pathocracy and creates unease. It is part of a culture of terror.
Thus, though official statements remain derisive and stomachs are churning among mid-long term holders of metal and mining equities, the outlook for gold is strong and like the pending market wash-out and currency re-set points to a new world reserve system. "Gold is still the heart of a power position" Catherine Fitts asserts in an interview with John Rubino. She believes gold's secular bull is intact and that sovereigns are trying to push retail investors out of their PM holdings.
While the markets dance to Sovereign tunes, investors have been leaving equities, Lipper reports. US-based stock funds reported $7.3 billion outflows in the week ending Wednesday April 24. Outflows from Equity ETFs were $8.4 billion for the week. As with mutual funds, this was the largest outflow since July 2012 and the fifth week in the last six with outflows. Fixed Income had inflows of $4.8 billion indicating alarm if not panic while money markets lost $4.4 billion suggesting that many people need to pay down debt or meet current expenses. Over $15 billion net left assets for cash, bullion or debt payments. This pattern indicates economic malaise just as the ISM numbers did early in April. Yet as retail investors flee equities, some entities push the markets higher beckoning with a siren song onto the rocks of a shattering economy. Lipper noted "general confusion in equity markets" which is a reflection of government manipulation directly and through fiscal policy. The markets have lost their rationality and predictive worth. Robert Fitzwilson of the Portola Group shares my view that investors felt and still feel the impact and implications of the Cyprus bail-in.
YTD equity funds and ETFs are up $118 billion but the week after the Boston turmoil saw heavy redemptions: the times do not inspire confidence or assist repose. As part of a flight to the deceptive safety of fixed income ($104 YTD inflows) investors are nailing themselves to a bubble of soaring bond prices and crushed yields. If sovereigns began selling debt either to invest or raise cash, bond prices will plunge and further harm sluggish economies. The Philly Manufacturing Index fell from March from 2 to 1.3, a massive monthly decline perhaps echoing durable goods orders which dropped 5.7%, a recessionary sign or worse. Plunging new car sales in Europe and massive joblessness among the young cited in my articles on EU woes also are a red flag.
In considering investor sentiment and solvency note that while YTD equity inflows are significant they are a fraction of the flight from stocks to bonds during the 5+ years from 4Q 2007 through 2012 which saw $966 billion shifted to fixed income. The last few years of this period of QE and crushed yields has meant people have been falling farther behind and deeper in the shade of a pending economic crash.
On his home page, in an April 26 summary (# 519) John Williams notes that "ongoing downturn and renewed stagnation are the underlying reality" of the economy. In #516 for April 12 he noted "looming fiscal fiasco and dollar debasement" as the essence of this year. My research says that unfortunately that view is accurate barring unimaginable acts of market manipulation by CB's to make markets soar away from crumbling economies as the top tier detach from the peons pulling the wagon. He confirmed my comments in earlier articles about flat retail sales, writing "March retail sales delivered a classic recession signal." Perhaps this is why Sovereigns are buying hard assets: this may be why one of their proxies drove prices down, so they could buy.
Consider the summary Williams provides on his impulse to begin his research service web site for American Business Analytics:
"The quality of government reporting has deteriorated sharply in the last couple of decades. Reporting problems have included methodological changes to economic reporting that have pushed headline economic and inflation results out of the realm of real-world or common experience."
That is, as Kafka wrote in 1924, the government's power lust and drive to make its self-serving fictions into truth "turns lying into a universal principle" embodied in virtual reality. The ISM figures and Williams' comments indicate a hectic hilarity like that which Poe described in "Masque of the Red Death" as midnight and death approach to silence the revelers. The masquerade will proceed as long as Central Banks and other too big to jail institutions buy, luring hedge fund and portfolio managers up the crag of new highs. When the sovereigns remove their masks and swing their scythes they will depart with the loot while retail investors drop like flies.
While $15.7 billion was withdrawn from equity ETFs and funds the S&P again made nominal highs: direct (POMO) and indirect digital money from the Fed is feeding this rally. These manipulated markets are deceptive and dangerous for most investors. Many crises exist in the world and any could be molded to crash markets and consolidate wealth as recently was done in precious metals and the mining sector. With crisis-creation and management the DOS of modern geopolitics, an emergency and crash could come any time like the bombings in Boston: the pathocracy will decide.
People do not buy bonds to see their NAVs rise: they buy for steady income. Allowing for income essential to your life, it is better to exit bonds priced at bubble levels and low yields to short term investment grade bonds, some bullion (be ready to weather volatility) and defensive sector equities like health care and utilities. The latter is one of the year's top performing sectors. Going forward, mixed energy and basic materials providers, such as Freeport McMoRan (NYSE:FCX) aims to be, should best weather all storms: the bigger the company the steadier the ride given what is ahead. Note that in recent days FCX has outperformed both the copper ETF (NYSEARCA:JJC) and Southern Copper (NYSE:SCCO). The next few years likely will belong to the behemoths, mega caps like Exxon (NYSE:XOM), Chevron (NYSE:CVX), Halliburton (NYSE:HAL), and McDonald's (NYSE:MCD) with its $5.39 EPS. Rio Tinto (NYSE:RIO) got a vote of confidence from the global power matrix recently when a host of European, Australian and Japanese Banks and the EBRD-IFC agreed to loan it $3-4 billion to develop its Mongolian holdings, mainly the Oyu Tolgoi mine held by its majority owned Turquoise Hill (NYSE:TRQ). At the other end of the spectrum, a small ($434) cap equity I mention again is mixed oil and gas, agriculture, agricultural nutrients and bullion Sprott Resource (OTCPK:SCPZF) that pays a monthly dividend that annualizes to 10.4%.
Position yourself accordingly. Depending on your need for cash flow and wish to participate in the party, continue nibbling at equities through low cost ETFs like Vanguard's mid-cap blend (NYSEARCA:VO), small cap (NYSEARCA:VBR), Mega Cap (NYSEARCA:MGV) and S&P ETF (NYSEARCA:VOO). Learn the price action and watch buying volume on green days: soon there likely will be some fierce downdrafts when one can add in these areas.
The final takeaway is that most investors need to watch indices daily and scan news so they can shift to defensive positions (more cash and short-term corporate bonds) or begin that shift now, including health care and utility funds and blue chips in the mix of their moated grange. Do not buy intermediate bonds till their price begins to drop and yields rise. Include a bit of bullion in hard asset vehicles like Asian Gold Trust (NYSEARCA:AGOL) or Sprott Physical Silver (NYSEARCA:PSLV) at current low levels. Night is falling: come in out of the storm.
Disclosure: I am long OTCPK:SCPZF, MGV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.