Move to cash: Markets look like 2011 again!
Over the past year a number of money managers have suggested the markets are frothy and a correction is due. Markets defied this wisdom for the past 12 months but calls for a correction have become stronger.
This is the first year in the election cycle, just as in 2011. The geopolitical climate is chaotic. Greece in a tailspin, and the Middle East is getting more dangerous by the minute. On a macroeconomic scale the dollar remains high which has essentially destroyed exports.
Oil remains low but taxing entities are trying to raise taxes and retail sales are down. US manufacturing is at a 25 month low. The unemployment rate at present is a clear as a pea soup fog. Amusingly, this is the number that the Fed is trying to decipher in order to price fix interest rates. [Setting interest rates is without a doubt, PRICE FIXING and that has always resulted in disaster.]
The FED keeps threatening to raise interest rates knowing full well this will trigger a bond sell off and stock market sell down. Ms. Yellen has prepared markets repeatedly giving her Greenspan impersonation of Irrational Exuberance yet has not touched margin rates. Why in heaven’s name would she be setting FED policy based on the stock markets? The Wealth Effect is why.
The Wealth Effect basically states that if Americans feel wealthy they spend more, buy more large ticket items etc. That is about the only idea the FED uses that makes any sense. But then to try to manipulate the wealth effect is where they go off into the wonderful world of price fixing. Thus, in an economy flat on its back, they attempt to manipulate the wealth effect to keep people spending.
But political policy under Obama is so out of sync with the FED objectives that the FED has resorted to hyperstimulation. For example. In a recession, Obama forces through Obamacare the largest tax in US History. Almost immediately declares a moratorium on the mandate for businesses but sticks it to the public. Net result: business profits rise and retail consumerism falls. In 2016, the BIG OBAMACARE Penalties kick in and businesses are frantic to get out of the way of this mess.
When Obama started his first term Manufacturing in American comprised roughly 25% of the economy. Today that number is down to roughly 17%. Businesses that can, are leaving US shores. Obamacare has put in place disincentives to growth. A small business with 49 employees would dare not hire a 50th because that would kick in the Obama mandate and essentially destroy the business. This is playing out now in 2015. Companies have to restructure and exit the USA. The Obamacare Mandate on business is essentially an across the board wage hike of roughly $5000 per employee per year out of after tax dollars. It is expensive and unsustainable.
The Fed keeps posturing blindly and the market keeps shuttering sideways. This is a bad sign. Uncertainty is always a bad omen in markets. Ms. Yellen doesn’t seem to have a handle on any of it. Our take is that it is best to assume this is a repeat of 2011 and gets scared early. These uncertainty markets become drag down markets that move down slowly and steadily but keep moving down. We look at the current markets as a game of Indian Poker where every variable rides atop a layer of quicksand and at any given moment potential disaster awaits.