I have long criticized the Fed for their endless drive to raise rates in a quest for a return to "Normalcy." I have pointed out, time and time again, that there was been no "Normalcy" for the past ten years as the central banks ramped up their balance sheets, bought bonds, and in some cases equities, such as in Japan and Switzerland, and controlled and dominated the financial markets. You may, in my opinion, have a shot at fighting city hall but you have no chance to fight the people that make the "Pixie Dust" money. You are constrained, they are not.
There were once "Bond Vigilantes" that roamed the countryside in search of cornering certain segments of the markets. They have long been penned up by the actions of the central banks. It has been go along, play along or get crushed. For almost ten years now, that has been the scenario.
Even with the Fed ratcheting back some, they still just control too much money to be messed with and their constant cries to raise rates have exactly the opposite effect of cutting taxes and regulations. The government is making every attempt to grow the economy while the Fed makes every effort to slow it down by raising borrowing costs. Who is working for who, we all have the right to wonder.
There is much speculation now about what the ECB might do in Europe and when. They have made noises about a September stall and, if it happens, the "Big Short" may be the sovereign and corporate debt in Europe. Now the ECB, according to Bank of America analytics, has invested about $84 billion in corporate debt in the European Union. This has been a combination of new issue buying and buying in the secondary markets. It held down spreads initially, but that theme is now changing.
According to Bank of America, EU spreads have actually widened approximately 67 basis points since the beginning of this year. That may be a telling sign of things to come. Bank of America states, "Europe's cyclical capitulation" has started to unfold and in just the past 7 weeks, investors have unwound a 1/3 of inflows that have taken place into EU equities over the 15 months as ECB QE failing to reduce credit spreads."
Debt or equities, the European markets may be in for a shellacking as Mr. Draghi & Co. head for the sidelines. Growth in Europe has slowed and, in any event, yields in Europe make little sense beyond the obvious buying, by the European Central Bank. When they stop, in my view, the wailing will begin because borrowing costs for every nation in Europe will rise and rise rather significantly, in my estimation. You may have a mandate for European investments, which is fine, but short of that I do not recommend investments in Europe at present.
Another reason to avoid Europe, presently, is what is happening in Italy. London's "Express" states, "Italy's anti-establishment Five Star Movement is ready to strike at the heart of the European Union proposing a referendum on the Eurozone, a move that could spark the exit of Italy from the bloc. In fact, Beppe Grillo launched a blistering attack on the EU Friday saying the bloc's regulations "distort" treaties that were right for EU citizens. He went on to proclaim that "I therefore proposed a referendum on the Euro because I want the Italian people to express themselves." Mr. Di Maio, also of the Five Star Movement, said: "Leaving the Euro means less troika, less taxes, more investments and more energy."
Trouble, is brewing in Italy, in my view, and a very dark "Italian Roast" is in the coffee pot. Here is one more reason to avoid the Continent, at the moment. The risk is way more than the reward now and that should be seriously noted.
Speaking to CNBC anchor, Becky Quick, ahead of Berkshire Hathaway's (NYSE:BRK.A) (NYSE:BRK.B) annual meeting in Omaha, Nebraska on Saturday, Warren Buffett, the billionaire investor, said bitcoin, the largest and most well-known cryptocurrency, is "probably rat poison squared." I am asked often about bitcoin. I hold the same view as Mr. Buffett. The basic issue, in my opinion, is that if bitcoin begins to impinge on national currencies that many nations will just shut down the trading of it in their respective countries. I wouldn't touch this stuff with a 50' pole, much less a 10' one.