I'm Back: Fed Cornered

I know its been awhile(2 years?).  My life got busy and my priorities had to change for a tad.  That’s how life works at times isn’t it?

I wanted to share a few thoughts on our markets as we head into chaotic times.  My fears are pretty much summed up in this chart:

We’ve had an epic stock run that was abruptly slammed shut in August with a sharp 12% pull back in a matter of days.

Why?

The money printing by the Fed via QE has led to historic asset prices via zero rates.  This has pushed the stock market to historically high levels. At the same time however its creating massive distortions in the markets.  Oil and other commodities have crashed as a result of this easy money. The reason for this is these conditions have enabled industries such as the oil companies to leverage up at insanely low borrowing costs and build thousands of wells and pump massive amounts of oil.  This is all well in good as long as prices stay high.

However,  China is borderline crashing which has cut down on their demand for oil and other commodities.  Europe’s slow economy has further exacerbated these problems.

This economic shock then pushes all emerging market oil dependent countries to the brink of collapse.  There are rumors that Brazilian giant  Petrobas might default as a result of these issues.  This oil shock will eventually wreak havoc on the high yield debt markets(mark my word).  Just look at HYG’s price action for a peak into the future.

Housing is booming since again thanks to zero rates and an improving jobs market combined with overseas billionaires looking to buy real estate as a hedge to their own crashing economies.  I suspect in the big cities this will continue but we are nearing a top IMO. 

I’m seeing similar behavior to 2008 in housing  When bidding wars reappear it’s NOT the time to buy.  You want to buy when assets are hated not loved.  I realize inventories are low but if the economy softens into recession or rates rise you will regret buying now.

Overall, my concerns are reflected in the chart above.  Debt loads of Americans are soaring, wages are shrinking, and home ownership is becoming a pipe dream for the younger generations.  Baby boomers are also downsizing as they retire.  All of this will pressure housing in the future.

The Bottom Line

America is heading in the wrong direction.  The Fed’s refusal to raise rates is proof of this.  They had a legit chance to raise last week with decent economic numbers and they punted.  My question is why?  What are they seeing that the rest of us are not?

This was a huge mistake IMO because it creates uncertainty.  Making matters worse is the fact that the economy moving forward is most likely weakening which means they wont have another chance to raise rates. 

Please play defense on your retirement accounts.  I see lots of volatility and lower prices in the near future.