Get out of Stocks! - The Daily Reckoning

Get out of Stocks!

Dec 16, 2015


Paris, France

Tomorrow is the big day. An historic day, actually. Never before in history has something like this happened.

After seven years of the Fed's ZIRP, short-term interest rates are expected to begin moving back to 'normal'.

Yesterday, we discussed how markets work. Nothing clever or controversial about it. We just observed that they go up and down.

We also noted that if investors knew that the fix was in and that markets would go only in one direction, it would wreak havoc.

Investors, businessmen, consumers - they would all make decisions they wouldn't otherwise make.

Corrupt Markets

For example, they may buy into a junk-bond fund...

Normally, the risk of junk bonds is rather obvious. Rates might rise, bond prices might fall, and your investment might be wiped out. Or the shaky businesses that issued the bond may default and stiff their creditors.

But when you know the Fed has your back, it's no longer an even-odds bet. You've got an edge. And others will see the same opportunity.

Pretty soon, junk bonds that would otherwise sell for, say, $100 are selling for $200. The trade - borrow at a low rate, lend at a higher rate - gets crowded. And dangerous.

  Equitymaster Conference 2016  
23rd January. Mumbai, India
  It gives us great pleasure in extending you an invitation to join us at the Equitymaster Conference 2016. This is going to be one of our most important Conferences ever! And I strongly recommend you attend it.

At the Equitymaster Conference, our best ever line up of speakers, starting with Ajit Dayal (Founder, Equitymaster) and Bill Bonner (Founder, Agora Inc.) will aim to address all your questions about the current investment environment, thereby help you in planning your next steps. Including...

»  Where are the stock markets headed?
»  What should be your investment strategy for Indian stocks?
»  Is it finally time to get bullish on real estate?
»  Is the Gold story over?
»  What's next for India's economy, and the Indian Rupee?

Plus, at the Conference you will get an opportunity to rub shoulders with not just our speakers, but also like-minded investors from across India (Last year we welcomed guests from 33 cities, and 3 countries).

So if you are serious about your investments, The Equitymaster Conference 2016 is something you cannot afford to miss. More details about the Conference and our speaker line up are available here.

We suggest you move very fast on this invitation.

Reserve your seat under our 'Early Bird' opportunity!

Corrupting a market is a little like buying a politician: You can't count on him to stay bought. We saw that yesterday, too. Markets dodge. They duck. They go underground. They develop curvature of the spine, neuroses, and epizootics. They forget that the fix is in.

But markets don't ever stop working...

We saw what happened in 2007. Cheap credit pulled in marginal buyers...and buyers from the future. Prices rose. The typical house became much more expensive than the typical buyer could afford. The bids disappeared. Prices fell.

House prices were the collateral of the entire mortgage derivative monstrosity, to which the geniuses of Wall Street had nailed their careers, their fortunes, and their institutions' net worth.

So, falling prices meant the whole kit and caboodle was in trouble. In a few months - after Fed chief Ben Bernanke assured us that the problem was 'contained' - it spread to the entire economy.

Warning Sign

Now, eight years later, cracks are appearing in the subprime corporate debt market.

From the Wall Street Journal: 'Junk-bond selloff intensifies.'

And CNBC asks the critical question: 'Are junk bonds flashing a warning sign?'

The answer to that question is, of course, yes! But there is a lot of straw on this camel's back. Sooner or later, someone should call the SPCA...

Tomorrow, most likely, the Fed will do something silly and cruel: It will add a tiny piece of straw.

In itself it is insignificant; the Fed will most likely raise rates by a mere quarter of a percentage point. But the move is supposed to telegraph that the Fed intends to add a lot more straw.

That should signal the end of this strange period of near-zero rates. Ordinarily, rate rises aren't necessarily bad for stocks...or even bonds.

But these aren't ordinary times...

After seven years of the Fed's ultra-low rates, never before has so much cheap credit been available to speculators. As a result, US stocks and bonds are near their most expensive levels in history.

And when assets are priced for perfection, things tend to go wrong...

This time around, even a token rise in rates could mark the end of the Fed-induced bull market in stocks that began in March 2009. It may even be the end of the bull market in bonds that began in the early 1980s.

No More Normal

Of course, there's a big BUT...

In the spirit of fraudulent 'transparence', Janet Yellen will announce that she'll keep a close eye on the camel's health at all times. She'll watch for the first sign that the knees are buckling. She'll conduct X-rays of the animal's vertebrae. She'll make sure that it has plenty of food and water.

If the beast seems to be suffering, the quacks will immediately take action!

In other words, the Fed will signal two contradictory things at once: that it is beginning the process of normalisation and that it still has investors' backs.

It can't do both. (It can't really do either...but that's a longer discussion.)

A normal economy is one with ups and downs. A normal economy includes recessions and bear markets. You can only avoid the recessions and bear markets - and then only temporarily - by tampering with the signals that guide investors and businesspeople...and by propping up the camel with posts and slings.

So which is it?

A return to sound money and interest rates set by willing borrowers and lenders...followed by inevitable bear markets and recessions? Or a continuation of phony money...the Fed's phony rates...followed by bubbles, crashes, and depressions?

We think we know.

In the meantime, this advice from veteran trader Dennis Gartman: 'Get out of stocks!'

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Recent Articles

The Market Gods Are Laughing July 13, 2018
President Trump escalated the trade war yesterday, and the Chinese say they will retaliate. Where is this trade war heading? Bill shares his insights.
MSP Leads to Excess Procurement of Rice, Which Leads to Waste of Water and Money July 12, 2018
Wheat, MSP, Food Corporation of India, CACP
We're Living in a Deep State Paradise July 12, 2018
Bill Bonner offer insights into how Big Technology is working with the feds to use data to control every aspect of our lives.
The Multiple Problems with the Minimum Support Price (MSP) System July 11, 2018
The price signals that MSP sends out, creates its own set of problems.

Equitymaster requests your view! Post a comment on "Get out of Stocks!". Click here!

3 Responses to "Get out of Stocks!"


Dec 18, 2015

The interest rate system should be at least 2% more than the inflation rate; if you manipulate this with low or high interest rates then the obtained economy will utopian and short term. This type of economy will not sustain for a long term.



Dec 17, 2015

Dear Bill Bonner

I read your articles regularly ,and Most of time they are for international markets.
You wrote saying get Out of Stocks , this one specific to which particular market USA or India also,
On other hand Equity Master is suggesting to buy stocks currently which are available at good rates !!!

so please clarify or write additional article with more details




Dec 16, 2015

Why you are trying to make people panic. What is the good idea. Stop investing in equoty

Equitymaster requests your view! Post a comment on "Get out of Stocks!". Click here!