Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24
US House Prices Trend Forecast 2024 to 2026 - 11th Oct 24
US Housing Market Analysis - Immigration Drives House Prices Higher - 30th Sep 24
Stock Market October Correction - 30th Sep 24
The Folly of Tariffs and Trade Wars - 30th Sep 24
Gold: 5 principles to help you stay ahead of price turns - 30th Sep 24
The Everything Rally will Spark multi year Bull Market - 30th Sep 24
US FIXED MORTGAGES LIMITING SUPPLY - 23rd Sep 24
US Housing Market Free Equity - 23rd Sep 24
US Rate Cut FOMO In Stock Market Correction Window - 22nd Sep 24
US State Demographics - 22nd Sep 24
Gold and Silver Shine as the Fed Cuts Rates: What’s Next? - 22nd Sep 24
Stock Market Sentiment Speaks:Nothing Can Topple This Market - 22nd Sep 24
US Population Growth Rate - 17th Sep 24
Are Stocks Overheating? - 17th Sep 24
Sentiment Speaks: Silver Is At A Major Turning Point - 17th Sep 24
If The Stock Market Turn Quickly, How Bad Can Things Get? - 17th Sep 24
IMMIGRATION DRIVES HOUSE PRICES HIGHER - 12th Sep 24
Global Debt Bubble - 12th Sep 24
Gold’s Outlook CPI Data - 12th Sep 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

The Money Illusion: What This Picasso Tells Us About the Dollar

Currencies / US Dollar May 18, 2015 - 06:41 AM GMT

By: ...

Currencies

MoneyMorning.com Michael E. Lewitt writes: With the purchase of Picasso's Les Femmes d'Alger dans leur appartement (Version O) for $179 million, the world was served up another piece of evidence that money has lost all value.

Some will argue that such a price is justified for such a one-of-a-kind object, but what is really going on is not that the value of art is increasing but that the value of the paper currencies being used to buy it is being destroyed by central banks who print trillions of dollars of money around the clock.


This phenomenon – which the economist Irving Fisher named "the money illusion" – is causing massive inflation in financial assets around the world – stocks, bonds, real estate and yes, art.

This is contributing to increasing wealth inequality since the only people who can afford to own such assets are the rich.

As the rich get richer, the other 99% keep falling further behind. The game is rigged to work that way…

Other Rough Lessons to Be Learned

As stocks again flirted with new highs last week, we learned that second quarter GDP growth in the United States is fading fast.

The latest estimate from the Atlanta Fed is that it is currently a mere 0.7% while first quarter GDP is widely expected to be revised downward to a negative number. In the face of this stubborn economic weakness, investors are still content to bid up stocks to record levels and Corporate America continues to engage in an orgy of mergers as it desperately seeks to grow in any way it can.

The latest evidence of this was the purchase of AOL by Verizon, which brought back memories of the last time AOL was merged in perhaps the worst deal in history, the Time/AOL merger in 2000 at the height of the Internet Bubble.

Some argue that mergers are a sign of confidence on the part of corporate managements, but I have always believed that they are often a sign that management is seeking growth outside of its business because internal growth prospects are limited.

This view is supported by the fact that many mergers fail to generate the promised results and virtually all of them lead to layoffs and other cost reductions that are negative for economic growth. There have already been more than $1 trillion of mergers announced in 2015, a sign that companies are looking outside for growth.

Recent market strength has been supported by two interconnected factors: a weakening dollar and rising oil. After breaking out of the gate with a huge rise against the euro and other currencies in 2015, the dollar has taken a step back in recent weeks.

The euro started the year at $1.20, weakened to $1.05 and is now trading back at $1.14.  This is likely due to a growing belief that the Fed will wait until at least September to start raising rates.

The pause in the dollar rally has been responsible for a better than 40% rally in oil off its low price for the year, which has helped energy companies raise a lot of new equity and debt to get through a period of low prices.

Don't Count on a Weak Dollar or High Energy Prices

Higher oil prices has helped the energy sector of the S&P 500 (INDEXSP:.INX) recover in price. Unfortunately, neither dollar weakness nor higher energy prices are likely to persist over the next few months. The express policy of other central banks is to weaken their currencies and they will likely redoubled their efforts to do so.  A stronger dollar will renew pressure on oil prices.

In the meantime, the fixed income markets remain a wasteland for investors.

The two largest bond funds are the $110.4 billion Pimco Total Return Fund Institutional Class (MUTF:PTTRX) and the $117.3 billion Vanguard Total Bond Market Index Fund Investor Shares (MUTF:VBMFX) (the latter just overtook PIMCO's fund as the largest bond fund in the world).

PIMCO's fund has earned an average return of 3.24% over the three years ended May 1 while Vanguard's fund has earned an average return of only 2.44% over the same period.

Once touted as must-have investments, these have been reduced to glorified money market funds by the Federal Reserve's policies that have effectively destroyed bonds as an asset class.

But These Securities Aren't What They Seem

What investors may not realize is that these funds invest in derivatives such as options and futures, foreign bonds and other instruments and are far from the plain vanilla bond funds that they are portrayed as in the media.

They have no choice but to chase yields in a no-yield world.  This is what happens when central banks squeeze interest rates down to zero and buy most of the available bonds and hoard them on their own balance sheets.

Now that stocks are back at their all-time highs, investors are waiting to see if they will finally break out of the range in which they have been stuck for the last few months.

It appears that concerns about the Fed's intention to raise rates later this year have placed a cap on the market. But as economic data has weakened, investors are trying to talk themselves into thinking that the Fed may wait even later than September, which would give them the courage to push prices even higher.

In my opinion, this is a very dangerous game. Valuations are high and the Fed is more likely than not to raise rates before the end of the year if only to protect its credibility. While one of two 25 basis point rate hikes would not be a big deal in terms of magnitude, it would signal, as New York Fed President said earlier this week, a "regime change."

What that means is that it would be the first rate hike in over 7 years and indicate a change in policy direction. The Fed probably wouldn't raise rates again for a long time after such a move, but the likely result would be another leg up in the dollar rally and some serious market volatility (including a drop in stock prices).  Investors should proceed cautiously in the weeks and months ahead.

Source :http://moneymorning.com/2015/05/17/the-money-illusion-what-this-picasso-tells-us-about-the-dollar/

Money Morning/The Money Map Report

©2015 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in