A Market Devoid of Fear

June 3rd, 2014
in contributors, syndication

Don't Get Comfortable

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"What, me worry?" The VIX "fear/complacency index" has been gliding along at very low levels for about two years and now is at its lowest monthly point since 1997, before the market peak in October 2007 and the market devastation of 2008. The stock market is almost totally devoid of fear. The mutual funds' cash accounts are nearly empty.

Follow up:

Market participants are fully invested, whether in stocks or in junk bonds (there has been, and continues to be, a huge run into junk bonds) - or both - anything that promises a "return." Not just an eventual return, but a near-instant return; so Gold has been shunned because the perceived return will not occur quickly enough. These are rabid moves seeking instant gratification. This is what happens when Government interferes with the workings of a market by keeping interest rates artificially low, so that banks pay virtually zero interest on CD's and force people into making desperate and dangerous moves in the hope of achieving any kind of a decent return on their money.

The Fed wants interest rates to stay low, because any rise in the rate of interest that it must pay on its own newly-issued Bonds is hurtful to Government, which always takes care of itself first, regardless of the adverse impact upon savers. Government will do whatever it needs to do, in order to survive. We saw that happen not long ago in Cyprus, where bank accounts were raided by the national Treasury, and strict capital controls were installed. (Raiding bank accounts is called "inverse bailout." If you think it couldn't happen here, or if you think that your IRA's and similar accounts are immune from raiding in one form or another, think again).

Which leads us to July 1, less than a month away, when new capital controls come into effect right here in the USA. Your freedom to move your money about the world is going to be restricted. And then, not too long from now, a "Reset" will come into play (courtesy of the International Monetary Fund), whereby the value of the world's currencies relative to each other will be "reset" by fiat.

The US Dollar is losing ground. Historically, oil has been paid for, worldwide, in US Dollars. That is changing. We see now that Russia and China have completed a transaction, good for 30 years, whereby Russia will sell oil or gas (or both) to China and will be paid therefor in renminbi (also called the "yuan," a nickname if you will, like the "buck.") Other nations (including Japan, South Korea, South Africa and others) have made similar arrangements with Russia and with Iran whereby they will pay for oil and/or natural gas in their own currencies, not the US Dollar. I have not read any account, as yet, announcing that Saudi Arabia has agreed to accept payment for its oil in any currency other than the US Dollar - but the trend has been established, and we can expect it to happen.

There is a worldwide move to replace the US Dollar as the "world's reserve currency," which it has been, since the end of World War II. (For centuries before that, British Sterling was the world's reserve currency). The plan is to replace the dollar with a "basket" of currencies, which might or might not include the US Dollar.

One can imagine the day when even Saudi Arabia refuses to accept payment in US Dollars for its oil.

One adverse effect of all of this change is that other countries have been shy about joining the US in the sanctions against Iran that the US would have preferred, because those other countries now find themselves freed from the US Dollar in that they are able to pay for Iranian oil with their own currencies. We were naïve in believing that the "sanctions" would have the effect that we desired. Meanwhile, the centrifuges continue to spin and Iran gains ground in the nuclear negotiations, the world becomes less safe, and Israel is tempted more and more every day to take pre-emptive action.

These are radical upsets in the way that business has been done.

One could even foresee the day when China will no longer accept US Dollars in payment for its exports to the US, and will require that it be paid in yuan instead. Walmart would be right in the middle of that (I've read that 20% [by value] of all Chinese exports to the US is sold in Walmart stores). Recall also that Walmart is the largest private employer in the US.

The stock market is going to be hit very hard. Junk bonds and municipal bonds are disasters waiting to happen.

How did this mess come about? It happened because the US has been living high on the hog for a long time, spending more than it takes in. The capper has been the Fed's "quantitative easing" program, which has created billions upon billions of dollars out of thin air, thereby devaluing the dollar month by month. It goes back even further, to August 1971, when Nixon "shut the Gold window" (whereby foreign countries could no longer redeem their US Dollars in exchange for Gold), and thereby converted the US Dollar into a pure fiat currency, with no promise of backing by anything. Two of the main precipitating causes for "going off the Gold standard" were the cost of the Great Society and of the Vietnam War.

One could argue that the budget-busting cost of our foreign adventures in Iraq and in Afghanistan has contributed to the dollar's present difficulty. The Treasury has issued Bonds after Bonds after Bonds in order to cover the deficit. The Fed has been gobbling up Treasury Bonds with "money" that it manufactures out of thin air - which amounts to constant devaluation of the dollar by this "quantitative easing." The program got so far out of hand that other countries have become queasy, to the point at which trust has dissipated and they no longer are content to be locked into a system which up to now has been dominated by the US Dollar. They have sought alternatives, and they are finding them.

The process of alternative solutions has just begun This does not bode well for the US Dollar or for your investments.

The first "hit" will come very soon - less than a month from now, on July 1. That will be the first of many.

You know what I think of junk bonds and municipal bonds. If you have any, why? You must enjoy whistling past the graveyard.

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