In speaking with a bright, young financial planner (okay, it was my son) yesterday, I heard a notion that I just can’t get out of my head. I was bemoaning the algorithmic state of affairs, how the markets are being propped up by the BOJ, ECB and FOMC with currency manipulation, outright stock purchases and derivative tampering (VIX and treasury futures, among others.)
My son, who is certainly smarter than I, suggested that it was a good thing. To paraphrase, he asserted that it allowed investors to build wealth without having to worry about the market crashing. He’s right. It’s great logic… if the manipulation can be applied ad infinitum and without consequences.
But, there are consequences. The Japanese face higher food and oil costs due to the continual devaluation of the yen. American exporters are choking on the higher dollar. Those who want to purchase real estate are subject to inflated prices. Retirees are earning negative real returns on CDs and T-bills. There are many more.
But, the consequence that worries me the most is what these practices do to an investor’s frame of mind. There are countless retirees out there who can’t make it on the 0.15% CD the bank offers. They’re lured into the stock market (some would say “forced”) by the promise of high, risk-free returns.
Unfortunately — unless hundreds of years of history mean nothing — the market will go down eventually (that pesky ad infinitum part.) I don’t expect Yellen, Kuroda and Draghi will be around to help those who are wiped out — any more than their predecessors were in 2008-2009.
Pension plans, insurance companies, S&L’s, banks — all will be affected, of course — especially those with any exposure to the $1.5 quadrillion in derivatives sloshing around out there in the liquidity pool. The biggest will probably be bailed out. Again. And, the rest of us will scratch our heads and wonder why this keeps happening.
My son turns 25 next month. I hope he reaches his 30s without having to face a market meltdown. But, in my estimation, the odds aren’t that great — not as long as our long-term financial stability is undermined by the false promise of riskless investing.
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Speaking of which…this morning, I published these charts of the NKD and USDJPY — which were poised to reverse at their .886 Fibonacci levels.
Of course, that would have meant further downside for stocks. So, what did NKD and USDJPY do, instead? New highs! Ain’t life grand?
Check out the effect on SPX, the thin purple line — which has either started higher again after a corrective 3 waves or is taking a breather, a la Wednesday, on its way lower. My guess is the latter, with today’s bounce as a corrective wave 4 (it closed below Tuesday’s closing price.)
BTW, I wouldn’t be surprised to see the NKD and USDJPY’s gains evaporate after the “market” closes, having done their jobs and all.
Have a great weekend, everyone.