Making Money Alert: It’s Still All about the Central Banks

In case you were under the illusion that the rally in stocks and bonds was anything but a central bank-created construct, then the action in the markets over the past week should disabuse you of that naïve notion.

As I’ve been saying for some time now, the easy-money policies of the Federal Reserve, the European Central Bank and, most recently, the Bank of Japan (BoJ) have combined to pump tons of liquidity into the market. This excess liquidity has caused the prices of stocks and bonds to rise to such lofty levels that they can only be described as, dare I say it, a bubble.

Recall that last Wednesday, we saw the markets sell-off hard on the hint by Federal Reserve Chairman Ben Bernanke that the central bank would consider “tapering” its bond buying program and/or possibly raising interest rates during the course of the central bank’s next several meetings.

That one-day quake sent stocks down for their second-worst week of the year. In Japan, rumblings of a possible tightening of monetary policy by the Bank of Japan caused a mini-crash in the Nikkei, as that index sank 7%, or the equivalent of 1,000 Dow points, in just one trading session.

If we look at the chart here of the Vanguard Total World Stock ETF (VT), we see that global equities have indeed enjoyed a great run higher thanks in large part to central banks keeping the money spigot open. However, you also can see the recent pullback in VT, and that no doubt has a lot to do with the hint of “tapering” by the Fed and the BoJ.

As for bonds, the long-end of the U.S. Treasury bond spectrum is signaling a rise in bond yields (i.e. a rise in interest rates). The chart here of the iShares 20+ Year Treasury Bond (TLT) shows that bond prices have fallen precipitously in recent weeks.

This fund now trades well below its 200-day average and its 50-day average, a clear indication that the sell-off in bonds has begun.

Now, it’s often said that the bond market is smarter than the stock market, and the reason why is that bond traders usually represent the smart money on Wall Street. Well, if this is true, then bonds are really starting to signal a potential change in the central bank policy. If the bond market is right, then a correction in both stocks and bonds could be right around the corner.

If either of these situations takes place, then how will you deal with the fallout?

Subscribers to my Successful Investing newsletter service know exactly how we are going to position ourselves to weather the next market storm. You see, for more than 30 years, we’ve been helping investors navigate all sorts of market conditions, and this latest central bank dominated market is no different.

To find out more, check out Successful Investing today!

Will Speculators Ever Learn?

On Tuesday, I read a great little piece in one of my favorite financial blog sites, zerohedge.com. This short post basically showed readers that investors now have more margin account debt than ever before, which means that speculation in the financial markets is back with a vengeance.

According to the article, “that old-school indicator of exuberance” known as margin debt has now surged to record levels. The piece cites data from the New York Stock Exchange showing that April margin debt hit all-time records, “just in time for the S&P’s own all-time high fireworks spectacular.”

According to the data, margin debt (which is the debt taken on by brokerage firm clients who borrow from their brokerage firm to buy stocks on margin), has risen to $384 billion. That’s well above the levels of margin debt held in the summer of 2007 — just before the huge meltdown in the financial markets took place.

My question here is will speculators ever learn that chasing a bubble is a foolish pursuit and one that ends badly for most?

Given the reality of human nature, it’s probably going to take another busted bubble — and a lot of lost money — to get some investors to stop the madness.

Wisdom on Worry

“Worry is interest paid on trouble before it comes due.”

–William Ralph Inge

When you’re putting money at risk in the markets, you have to constantly be vigilant and take care of that money. You might even say you need to worry about it. However, while there is reason to be cautious and take care of your money, worrying about trouble before it comes due is a prescription for a lot of sleepless nights, and that’s no way to live a good life.

Wisdom about money, investing and life can be found anywhere. If you have a good quote you’d like me to share with your fellow Making Money Alert readers, send it to me, along with any comments, questions and suggestions you have about my audio podcast, newsletters, seminars or anything else. Click here to ask Doug.

To read my e-letter from last week, please click here. I also invite you to comment about my column in the space provided below.