My family has a very good friend that has been doing investment research for years and years and years. He has a medical condition that doesn't allow him to get out a lot and so he spends most of his time researching a few areas of interest, one of those being the financial markets.
Now I know none of you know who this person is, or his credibility, but he warned my family of the 2008 crisis, and we pulled all of our money out of the markets in 2007 and didn't lose a dime in the crash. We got back in around the DJI 8,000 mark. So obviously this guy has some credibility in my eyes.
Read this if you want, and give me your opinion. Do you agree with this? Parts of this? None of this? I thought it might be an interesting read for people on here! I look forward to a good discussion.
When asked what his position on the markets was currently, the below was his response:
Ever since the Fed, the ECB, and the PBoC started pumping trillions into the financial system, the markets have not been real. They are largely a liquidity-based ramp job. For instance, it's often the case that good news is good news, and bad news is better news. That's because the equity markets believe that the worse things get the more likely the Fed is to start the next round of QE. For this reason, the retail investor has largely departed the markets. Share volume is extremely low, and consists mainly of computers trading against one another. This adds to the artificial levitation since headline reading robots tend to buy reports of good news, but not sell it when the news is found to be BS. You can see this in spades with regard to Europe, where the equity markets appear to respond more to rumors and statements rather than changes in fundamentals, which only get worse by the day. And the bond market is also susceptible to this as QE and Operation Twist in the US, and LTRO in Europe have cause bond yields to be pushed down way below where they would be if a real market prevailed. So we basically have a one-way market. Equities only rise and bonds only rise. This has resulted in volatility metrics (the VIX), hitting near-all-time lows. In other words, complacently reigns. So does bullishness. This is very dangerous. Markets always turn when the sentiment becomes extreme, in either direction. Right now, the VIX is about where it was in 2007. That is, it looks to be calling a top. If Q1 profit reports disappoint, there will be a mad rush for the exits. I think there is already some distribution going on, where the big boys (hedge funds mainly) are selling into the dumb-money retail folks. As always, the little guy will be the ones holding the bag when the SHTF. And I believe quarterly reports of S&P 500 companies will disappoint. Europe is in a recession now, China has slowed and is headed for a hard landing, while the US is supposedly doing better, based on gubmint statistics. These stats are crap. Unemployment has fallen dramatically, while employment has not risen. It's a mirage. People are leaving the labor force and taking part-time jobs. Last month had the worst budget deficit in US history ($231.7 billion in ONE MONTH), while tax receipts were actually down YoY. Sound like a recovery to you? It's all BS. The economy is doing terribly. If deficit spending and Fed printing were to stop (or even slow down), the real economy would immediately tank. And if gas prices keep rising, the game of musical chairs will come to an end. Main Street is in the ditch. The Dow and S&P companies are doing better because they are all multinationals that can sell to those parts of the world that are doing okay. But the world is sinking under a sea of red ink. Japan now has a trade deficit. So does China. Asia can't keep the world afloat when it's two biggest players are going down. The property bubble in China is totally out of control and will blow up in the same way ours did in 2008. It's just that nobody knows when because China's economy is also not real, but simply a ponzi that functions based on the diktats of the politburo.
The bottom line is that this is not a real recovery. Europe is getting worse by the day, and central banks are running out of ammo. But as Keynes said, the market can stay irrational longer than you can stay solvent. For that reason, I have not been shorting the markets. There is a reason for the axiom "don't fight the Fed." When every light is flashing red and it looks like a top is definitely in, then the next round of QE will be announced and the shorts will get blowtorched, sending stocks dramatically higher as they are forced to cover, adding fuel to the rally. At some point this nonsense will end horribly, but no one knows when. In the mean time, Apple keeps going up. When it passed $600, it's market cap exceeded that of the entire retail sector. Let that sink in. Does that sound sustainable to you? It doesn't to me.
So I can offer no advice. I would not be in the market if you put a gun to my head. Particularly bonds. The bull market in credit that started in 1982 is coming to an end. Short term yields in T-Bills have actually dipped into negative territory in 2011. Can they go lower? Of course not. With inflation, real rates are way negative. That cannot last. People are paying sovereign bond issuers to take their money. The bond market is a lot bigger than the equity markets, so when it goes south, things can get ugly fast. Right now, the market for US treasurys is being buoyed by the chaos in Europe. But at some point, probably next year, it will come unglued. You can't solve a solvency problem by piling on more debt. Extend and Pretend will end.
My best guess (and that's all it is): The wheels come off this fall. If there is a war with Iran, that will trigger a market collapse. If the market holds up thru November, which is typical of an election year, it will not survive 2013. The end will come when the common man figures out that this is not a typical recession, and that it's not going to end happily. But just like 2008, that realization will probably occur after it's too late to exit the markets. Which is why I choose not to be in.