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February 27, 2015

In past posts I have discussed that while central banks attempt to continue the façade of appearing to be in control, there are actually market dislocations and nonsensical markets. I’ve compared the markets to a rigged casino — there is really no way for the average investor to win. So I was interested in watching Robert Shiller’s short interview on Yahoo Finance, in which he notes the obvious fact that the golden age of investing may be over, but Americans refuse to accept it (–robert-shiller-231354246.html). Shiller’s point is that old assumptions we used to use for saving for retirement have gone out the window. Instead of assuming that we can get annualized returns of 10 percent on your retirement savings, we may need to assume what the current bond rates are — essentially zero. So how can you possibly save enough? Shiller says you need to live like a poor college student; and by that he is not suggesting taking out unlimited student loans.

One reason Americans are not yet accepting the fact that a decent return on your investment can no longer be assumed is because, for now, the equity markets are continuing to set new record highs, and large institutional investors, such as pension funds, are making remarkable returns since the “end” of the financial crisis in 2009. But this is part of my concern—why are financial markets setting new highs? In the past, equity markets were at least somewhat correlated to what was happening in the economy. Ask yourself if today’s record-setting markets are an actual reflection of our record setting-economy. If you think the answer to that question is yes, you don’t need to read further. But I have to assume the reason anyone reads this blog is because they sense things are not adding up. It seems everything today hinges on whether our world central banks are going to continue to give us our economic heroin of easy money and a zero interest rate policy, which is now negative interest rate policy in numerous countries.

When I’ve talked about central banks and their unprecedented monetary experiments, I have often made a generalization by using the term, “our world’s central banks.” In reality, however, there is an amazing difference among the central banks’ policies. A few nations have quite a different position than one of easy money and zero interest rate policies. Russia, for example, in response to collapsing oil prices and the crashing Ruble, has an interest rate of 15 percent–17 percent. It’s interesting that the mainline financial media is not bringing attention to the disparate monetary policies among different central banks. But there are a few who are talking about the “divergence” in different central bank policies and making an astute observation that this divergence will cause us to hit a brick wall sooner than later. If the unprecedented monetary experiments of many central banks are supposed to be working so well, why aren’t all central banks participating? If we hit a brick wall because not all central banks are able to maintain the same monetary policies, there will be a once-in-a-lifetime opportunity to make a lot of money if you are on the right side of a bet on how this divergence resolves itself. When our financial markets are entirely about central bank policies, and not about what is happening in the economy, it is not a healthy market. Rather, it creates incredible dislocations from which smart people or insiders can make unprecedented riches. Divergent monetary policies may be our present-day subprime home loans equivalent in the potential havoc they may wreak on the economy.

Another thing, the speed at which segments of the financial markets move is unparalleled and seemingly intensifying over the last couple of decades. Contemplate some of our more recent market moves: the rise and fall of high tech/, the rise and fall of real estate, the rise and fall of equities, and now the rise and fall of oil prices. Except for oil, because we are still in the midst of the oil disruption, other assets have recovered at a breakneck pace. It has been my argument that this type of market volatility puts the small investor at a huge disadvantage. But our disadvantage is someone else’s advantage.

Returning to oil prices: how is it that the developments that have led to the collapse of oil prices — down nearly 70 percent since summer — took us all by surprise? The basic rationale behind this price drop is the exploration of shale oil and lower demand, neither of which occurred overnight, but for some reason knocked the feet out from under oil. It wasn’t long ago that a barrel of oil was $150; now it is below $50 and commentators are making a case as to why it will go below $40 per barrel, maybe as low as $20 per barrel. I want to ask, since the exploration of shale oil and lower demand has been building for a while, why weren’t these investment experts predicting this major drop last summer? I still have a difficult time purging my mind of the constant drum beat of “peak oil” (the theory that oil production will and already has peaked, driving prices higher and higher, necessitating drastic changes in our dependence on oil).

What we need to be discussing is “peak monetary policy, peak debt, peak derivatives, peak bubbles, peak volatility, peak manipulation…”

Yes, I think it is safe to say the golden age of investing is long gone — at least for the average Joe.

chessIf you haven’t had enough reading for one day, here’s another story worth reading:

One Comment
  1. Randy Nethery permalink
    March 2, 2015 11:05 am

    Great stuff, John! Economic bubbles and their eventual collapse always endure longer than predicted. Unfortunately, the greater the expansion the greater the collapse. This one’s going to be a doozy!

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