Yen Soars, Stocks & Bonds Go Bonkers as Central Bankers Lose Control

February 4, 2016 in News by RBN

Money and Markets | Mike Larson


The illusion of control. Can we all admit that’s what it was now? After all, does it make sense to anyone that a handful of unelected bureaucrats and economists … holed up in gilded conference rooms in Washington, Frankfurt, Tokyo or anywhere else … could artificially prop up markets and economies forever?

Sure, they could goose asset prices for periods of time. Sure, they could temporarily inflate a handful of credit-sensitive sectors. But when you think about it, the massive amounts of easy money pumped into global markets, the negative interest rates proliferating in more and more countries, and the impoverization of savers worldwide didn’t change the underlying problems faced by our economy or anyone else’s. They just papered over the problem.

Worse, those measures ensured we would remain caught in the boom/bust credit-cycle trap that has plagued the economy since the late 1990s. And arguably, this last bout of aggressive policy measures created the biggest batch of bubbles yet:

In junk bonds. Emerging-market bonds and stocks. Commercial real estate. Mergers and acquisitions. Stock buybacks. Initial public offerings. Artwork, collectibles, and trophy Manhattan condos. The list of wildly inflated assets goes on and on.

But with each passing day, it becomes clearer that central bankers are losing whatever control they had — a trend I warned was coming all the way back in July 2015.

Take the Japanese yen. The Bank of Japan managed to crush its value on Friday by cutting one key benchmark rate into negative territory. But a mere three trading days later, that entire move has been vaporized. The yen soared today as investors came to appreciate the BOJ’s “bazooka” is nothing more than a pea-shooter.

Or how about the bond market? I flagged the weakness in Treasury yields and the surge in Treasury prices yesterday, and those trends gathered even more steam earlier today. The 5-year Treasury yield sank as low as 1.2%, threatening the original upside breakout level that dates all the way back to the summer of 2013.

As for stocks, all the “stress point” names I’ve been monitoring and warning about — banks,real estate, you name it — swung all over the map.

“Central bankers are throwing new measures out there more and more frequently.”

The Financial Select Sector SPDR Fund (XLF) of major banks, brokers, and insurers briefly took out the low from a week and a half ago, while major European financials cratered across the board. The XLF is now down almost 14% year-to-date. The First Trust NASDAQ Global Auto Index Fund (CARZ) just sank to its lowest level since April 2013 (excluding the August 24 crash day), putting its YTD losses at a shocking 16%.

I think part of it is that central bankers are throwing new measures out there more and more frequently. They’re also hitting the speaking circuit almost every day, trying to “clarify” how markets should interpret and react to what they’re doing. To me, that smacks of panic.

Another reason for the loss of control? The markets know this stuff doesn’t work. Inflation breakeven rates. Treasury-yield spreads. Commodity prices. High-risk bond prices. Currencies. The economic data, itself. They’re all signaling a global economy that’s facing a widespread downturn and widespread deflationary pressures … DESPITE six-plus-years of so-called “stimulus.”

Just today, we saw job growth decelerate to 205,000 in January from 267,000 a month earlier, according to the ADP Research Institute. That’s still a decent number, but other forward-looking indicators are in much worse shape.

We also learned that the Institute for Supply Management’s service sector index dropped to 53.5 in January from 55.8 a month earlier. Not only did that miss economist forecasts, but it was also the worst reading in 23 months. The ISM’s manufacturing index is mired at six-and-a-half-year lows.

Bottom line: Wild volatility and crazy swings in everything from stocks to bonds to currencies make it abundantly clear that the illusion of market control is getting thrown out the window. That means you simply must take steps to adjust your portfolios, and protect your wealth – before it’s too late! Subscribers to Safe Money Report have been prepared and positioned for this kind of chaos since last summer.

In the meantime, what do you make of this cross-market volatility? Is the world spinning off its axis? Or is this just a temporary bout of madness that central bankers will succeed in tamping down very soon? What about the economic data? Do they confirm the U.S. is heading toward recession … or do they just indicate a short-term blip in the economic expansion? Hit up the comment section and share your insights.

Our Readers Speak

In the wake of the Iowa caucuses, several of you took some time to weigh in on the presidential race. There were also a couple of lively discussions about currencies, stocks, and interest rates.

Reader Chuck B. weighed in on politics, saying: “Trump must be seething. After leading by so much for so long, he barely got second place in Iowa. I’ll give him this: He didn’t show what he must feel in his concession speech.

“Of course, what we saw was one of the professional politicians pull out the win. Do we really want another professional politician occupying the White House? That seems to be all that’s left, except Hillary, and she is next thing to a professional – having been married to one, and in the spotlight for so long.”

Speaking of Iowa, Reader Tactical111 said: “Trump lost Iowa because he flat out said he’d eliminate the bogus ethanol program that Bush instituted to pay back his Iowa constituents. And he barely lost at that to Cruz, with both getting the same number of delegates. So it’s no big deal. Watch now as going forward, Trump runs way ahead of the pack.”

Reader D. said Donald Trump should do better in the next round, too, and also offered his take on Bernie Sanders: “Trump will win in New Hampshire. Iowa is a caucus made up of party regulars, not voters broadly.

“Sanders will probably place a strong second in N.H., though not as strong because activists will be less important. But that will be it. Sanders has no traction in the South, where we’re headed next, and he’ll run out of money soon.”

Finally, Reader Jim offered the following take on the Democratic nomination race: “Hillary is Hillary’s biggest liability. Her performance in the caucus and on the stage afterward was just plain bad. She was obviously angry. She made Dr. Dean look placid.

“She also relies on a few wealthy donors while Sanders got over 3 million small donations. If the current crop of politicians represents the Establishment, then the Establishment is in trouble.”

Switching from politics to currencies, Reader Anthony G. asked: “Why won’t the euro sell off. The continent is clearly in crisis.”

In response, Reader D. said: “Lots of emerging-market countries are selling dollar-denominated assets to prop up their currencies. Once that ends, the euro will decline more sharply, and the dollar will be up.”

But Reader John offered a contrarian take, saying: “I wonder: Do American investors understand the European economy? All the punters are predicting the collapse of the euro and the European project. I would not bet on this scenario. Europe has had many problems and all have been solved over time, making Europe even stronger.

“My scenario is a bit of volatility, a bit of negotiation and compromise, and then Europe is on the road to recovery. However a global recession could change that scenario and then all bets are off.”

Lastly, Reader Geoffrey C. shared his view on stocks: “The stock market is headed downward from here. The real question is, when will the bottom drop out of it in a serious way … and the S&P collapse below 1,700, below 1,600, or lower?

“Of course, anyone who can answer that question can buy put options at the right strike price and expiration date and get rich. My gut feeling is that this is the month for the first big move down, but there’s no way to know that for sure.”

I appreciate all the different viewpoints. I clearly agree with the bearish outlook for stocks, and I see several challenges for the euro region. Bank stocks are getting absolutely crushed there. Plus, Mario Draghi’s pledges every few days to throw “monetary policy spaghetti” at the wall to see what sticks smacks of desperation.

The only question for currencies is whether our economy is also starting to fray around the edges? It looks that way to me, which is why I believe one of my favorite “risk off” currencies is an even better “buy” right now. I gave Safe Money Report subscribers a recommendation to profit from it a few weeks ago, and I believe it will bear fruit soon.

The piece quoted the CEO of General Growth Properties (GGP), a mall operating REIT, as saying Amazon may open as many as 400 physical bookstores over time. The process would take years and there was no confirmation from the company. But if so, that would put Amazon in even more intense and direct competition with Barnes & Noble (BKS), which has 640 stores.

So what do you think about the dismembering of Yahoo, one of the original Internet pioneers? Or how about the possible aggressive push by Amazon into physical retailing? Any thoughts on the increasing desperation apparent in the world of central bankers? Share them in the comment section below.

Until next time,

Mike Larson

P.S. In case you missed it, I sat down today with Boris Schlossberg and Kathy Lien — both CNBC regulars — to discuss a very important topic: The fate of the European Union.

And while that is a fascinating topic in and of itself, we discussed new and exciting ways to PROFIT from Europe’s demise. This special interview will only be online a short time. I urge you to click this link now … before it’s gone!