Washington, DC -- (ReleaseWire) -- 05/31/2016 --In the 1951 movie On Moonlight Bay, Doris Day sings a Tin Pan Alley classic called "I'm Forever Blowing Bubbles." The first verse starts, "I'm dreaming dreams, I'm scheming schemes, I'm building castles high," but in the chorus, we learn the fate of all those dreams, schemes, and castles: "I'm forever blowing bubbles, Pretty bubbles in the air, They fly so high, Nearly reach the sky, Then like my dreams, They fade and die." It seems, maybe, that this could be the theme song for central bank driven monetary policy and market manipulation. Sadly, though, it is likely that the asset bubbles we're watching won't simply fade but rather explode dramatically, and with a great deal of collateral damage.
The past few weeks have thrown up many warning signs that this will be happening soon. Billionaire hedge fund manager Mark Spitznagel told Financial Times last week that "Markets don't have a purpose any more — they just reflect whatever central planners want them to." Spitznagel, who runs the tail-risk hedge fund Universa, goes on to say, "This is the greatest monetary experiment in history. Why wouldn't it lead to the biggest collapse? My strategy doesn't require that I'm right about the likelihood of that scenario. Logic dictates to me that it's inevitable." The article also quotes Universa advisor Nassim Taleb, best-selling author of Fooled by Randomness and The Black Swan, who says, "being protected from fragility in the financial system is a necessity rather than an option."
Spitznagel and Taleb aren't lone voices. The Bank of Japan, acknowledging the violence being done to the yen by years of quantitative easing, said recently that they are setting aside money to prepare for losses on their huge holdings of Japanese government bonds which were put together and purchased through their printing of fiat currency once they are finally forced to stop monetary easing. Easing is a vortex that has sucked in the central banks over the last eight years, forcing them to continue blowing bubbles to follow bubbles to follow bubbles. Indeed, there have been calls even for our own Federal Reserve to go beyond QE to "helicopter money," essentially going beyond interest rate manipulation and money printing by injecting "permanent" money directly into private sector. Could this be why China is establishing a yuan-denominated gold benchmark for trading, in order to start backing their currency with real assets instead of academic theories?
One of the biggest bubbles is close to home: the U.S. derivatives market is worth in total over $1 quadrillion dollars by some accounts, some twenty times the value of the entire global economy. This is simply the largest bubble in history, and it's sheer gambling, including not just equities but physical commodities. The legality is questionable in many cases, but the problem is definitely real and indisputable.
Look at some of the evidence of the thorny path ahead, if you will. Most asset classes are flat to negative year-to-date. Initial jobless claims were up for the third week in a row last week, spiking up to 278 million. We're seeing continued weakness in corporate earnings, increased layoffs, manufacturing data, and wages. After last week's FOMC meeting, the notes released indicated the possibility of higher interest rates, leading the June rate hike odds to go from 4% to 30% and the July odds to go from 20% to 50%. What will happen to our market bubbles then? Many hope that the Fed will continue printing money, but that option continues to degrade our currency and economy. Something will eventually have to give.
Articles across the media, including Bloomberg, Wall Street Journal, Reuters and Financial Times, noted that over 400,000 private sector workers in the United States are about to lose most of their pensions. Central States Pension Fund, which handles retirement benefits for current and former Teamster Union truck drivers across various states, among others, applied for reductions of payments to pensioneers under the law. Currently the plan pays out about 3.46 dollars in pension benefits for every dollar it receives from employers, a drain of $2 billion annually. The plan filed for a 60% cut in payouts, and the Treasury Department countered that the cuts aren't deep enough. This is a tremendous blow, but also a wakeup call. Not only with CSPF, but with state pension funds in Illinois, Connecticut, and New Jersey (so far), we have a mathematically unsolvable problem. Many may hope for the government to bail out the state pensions, but when private pension funds go broke, they just go broke. The Pension Benefit Guarantee Corporation may be expected to kick in the difference, but it is highly underfunded and isn't expected to be able to cover all the retirees in CSPF alone, even if the problem doesn't continue to grow.
Last week, analysts and money managers saw the right shoulder of the mother of all head-and-shoulders market patterns fall into place. This pattern—a peak, a drop, a higher peak, a drop, and then a peak that doesn't reach the level of the second peak—is a strong trend reversal indicator, and in this case a warning of bear markets to come. Central banks and governments will do all in their power to keep blowing their bubbles, propping up the present system, and it seems unlikely that they'll win. The ramifications are going to be tremendous, so invest accordingly. As the central banks keep responding to their ivory-tower fantasy world instead of the real world, it's increasingly important to evaluate carefully. Look at withdrawing to the sidelines, and consider strongly investing in assets that are increasingly seeming to be negatively correlated to the trend, such as gold and silver.
For over a quarter century, the experienced advisors of Bennett Group Financial Services, LLC have been successfully guiding clients through the complexities of wealth management. Bennett Group Financial Services provides individual investors, corporations and foundations with holistic investment strategies using unique portfolio solutions across a breadth of asset classes. Our unique vision and insight into market trends makes Bennett Group Financial Services a much sought after expert resource with regular appearances on Fox News Channel, CNBC, Bloomberg TV, and MSNBC as well as being featured in Business Week, Fortune, The NY Times, The NY Sun, Washington Business Journal in addition to our highly regarded weekly talk radio program - Financial Mythbusting. Through attentive service and prudent, thoughtful advice, Bennett Group Financial Services, LLC strives to consistently provide its clients with the highest quality of guidance and personalized service available.
About Dawn Bennett
Dawn Bennett is CEO and Founder of Bennett Group Financial Services. She hosts a national radio program called Financial Myth Busting http://www.financialmythbusting.com.
She discusses educational topics and events in the financial news, along with her thoughts on the economy, financial markets, investments, and more with her live guests, who have included rock legend Ted Nugent, as well as Steve Forbes and Grover Norquist. Listeners can call 855-884-DAWN a as well as take podcasts on the road and forums for interaction.
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