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Have Central Planners Lost Control?

Tuesday, July 28, 2015
Money and Markets
You can also access this issue on our website.
Autopilot Market Stumbles -- Have Central Planners Lost Control?
Market Roundup
Dow +189.68 to 17,630.27
S&P +25.61 to 2,093.25
NASDAQ +49.43 to 5,089.21
10-YR Yield +0.02 to 2.25%
Gold -$1.70 to $1,094.90
Oil +$0.42 to $47.81

By Mike Larson

The “Autopilot Market.” That’s what we’ve had for the past six-plus years.

We’ve recovered from every minor stumble.

We’ve bounced sharply after every deeper pullback.

We’ve hardly seen a 10%+ correction along the way, much less a serious decline of 20% or more.

And who’s to thank (or blame, as the case may be)? The world’s central bankers/planners.

They’ve swooped to the rescue at every significant sign of turmoil – promising more interest-rate cuts, more money printing, more cheap liquidity, more currency manipulation, more of everything. Investors came to accept that level of intervention and the control over the markets, and wrapped themselves in the warm security blanket it provided.

China’s central planners brought out the ‘bazooka’ to stop the losses on the stock market but to little avail.

That’s why what’s happening in markets now is so worrisome, dangerous and potentially HUGE in terms of signaling a serious trend change.

Take China. After the stock market started tanking there, the central planners and central government started firing off every “bazooka” they had in their arsenal. Bans on large insider sales, added liquidity for brokers to buy stock, direct purchases of equities from a government-backed fund, the suspension of IPOs – you name it, they did it.

But what happened? After a brief bounce, stocks tanked anyway! They just plunged by the second-most in any single day, ever.

Now, compare that response in China to what happened several years ago here when then-Federal Reserve Chairman Ben Bernanke first launched QE. Or even three years ago across the Atlantic when European Central Bank President Mario Draghi said he would do “whatever it takes” to hold the euro currency union together.

Both events marked significant, confidence-building, volatility-taming bottoms. The markets were soon off to the races again, resuming their up-and-to-the-right rally with nary a scratch.

Could the deterioration we’re seeing now – among market sectors like transports or materials … “China proxy” investments like copper and the Australian and Canadian dollars … and even the Russell 2000 Index — be signaling a sea change? Are central bankers losing control of the autopilot system, just like their central planning forebears did in planned economies in the past?

Boy would that be a change of pace! It would be yet another signal that my Bloody Wednesday forecasts are coming true, and that things are going to get a lot more volatile and scary in the weeks and months ahead.

Indeed, while I don’t expect the Fed to hike rates tomorrow at the conclusion of their current policy meeting, I do believe we could see them move as soon as the September 16-17 gathering. History also shows that once the Fed starts hiking, it keeps doing so for several meetings and percentage points. That means we’re in for even more Bloody Wednesdays in 2016 and beyond.

“Could the deterioration we’re seeing now be signaling a sea change?”

I’ve already been recommending steps to prepare: Eliminating long-term bonds from your portfolios, avoiding the most rate-sensitive sectors of the stock market, sticking only with the highest-rated stocks in powerful sectors experiencing their own private bull markets, and dabbling (gingerly) in the most beaten-down, dirt cheap stocks that already reflect a huge amount of pessimism.

More recently, I have also taken profits off the table and raised cash in order to reflect the increased market turmoil. And I’m looking at other strategies that would make sense if the market’s autopilot truly is failing, and the great bull market that began in 2009 is now ready to crash and burn. So definitely stay tuned for more updates and guidance at this important moment in time!

What do you think? Is the autopilot market over? Have the Fed and its counterparts overseas lost control of asset pricing? Does that mean we’re in for a lot more turmoil, and if so, how are you adapting? Definitely share your thoughts on these important topics at the Money and Markets website when you have a minute.

Our Readers Speak

Meanwhile, some of you are concerned about the possibility of significant turmoil – and are already weighing in.

Reader Kurt said: “I’m sure you’ve read Larry Edelson’s economic forecast for much of the remaining decade concerning the U.S., Asia, and Europe. He plainly sees a domino effect for financial collapse starting with possibly Japan, then ending of course with the United States. But I believe 20,000 is possible before a major correction.”

At the same time, Reader Chuck B. shared these thoughts about what’s going on in China: “The markets began what should have been a normal correction to digest the big run-up they’ve had. The bureaucrats stepped in and took pretty drastic measures, which caused a pause in the correction.

“Then some investors may have realized: ‘If the government can do that to the big investors, what is to keep them from doing it to me?’ Maybe that has something to do with Monday’s market drop. Americans might want to understand something like that could happen to them also.”

Good observations. Larry and I talk all the time, and we both share concerns about major market turmoil in the months ahead. As for China, the key going forward is whether policymakers are truly losing control of markets there AND here. That would mean it’s “Buckle your seatbelts” time for the second half of the year.

If I didn’t get to your comments here, or you haven’t added your thoughts to the discussion yet, make sure you head over to the website and do so now.

Other Developments of the Day

BulletConsumer confidence dropped sharply 90.9 in July from 99.8 in June. That missed the average forecast of 100, and was the lowest reading for the Conference Board index since September 2014.

BulletThe American Dream of homeownership is continuing to die a long, slow death, according to the Census Bureau. It found the U.S. homeownership rate sank further to 63.4% in the second quarter. That was down from 63.7% a quarter earlier, and the worst level going all the way back to 1967.

I blame tighter mortgage standards, lackluster income growth, and insufficient down payment funds among younger buyers, not to mention high student debt loads. Then there’s the lingering psychological damage of the housing bust, and the desire for more mobility among the typical first-time buyer demographic. Renting keeps them from being tied down – a desirable situation given the fact “jobs for life” are a distant memory these days.

BulletPresident Obama’s nuclear deal with Iran is attracting a heck of a lot of scrutiny in Congress. His representatives, including chief negotiator and Secretary of State John Kerry, spoke before a House committee today in an attempt to sell lawmakers on it. Congress will have a chance to vote “yes” or “no” on the deal in several weeks – though Obama has threatened to veto their vote if the deal is rejected.

BulletThe all-male club of NFL coaches will finally get its first female member. Jen Welter is joining the Arizona Cardinals staff as an inside linebacker trainer, after stints as a coach and player in the Indoor Football League in Texas.

If you were in Congress, would you vote for or against the Iranian deal? What do you think about America’s slumping homeownership rate? Any of these other stories you want to comment on? Then here’s the link where you can get the conversation going.

Until next time,

Mike Larson

Mike Larson
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
The investment strategy and opinions expressed in this article are those of the author's and do not necessarily reflect those of any other editor at Weiss Research or the company as a whole.

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