Sunday, March 17, 2013

US stocks climb to new record high: is this a bubble?

(17 March 2013)  As the Dow continues to set new all-time highs, one may well ask if we are in the middle of a financial bubble.  Financial markets continue to look quite robust here as the Fed's QE3 program into virtual perpetuity has seemingly removed all risk from the stock market.  With no quick end in sight to QE3, investors are only too happy to follow on Ben's lead and pile into stocks.  Much of the post-2009 stock market rally is rooted in central bank programs to free up liquidity and encourage investment in risky assets such as stocks.  This has deliberately punished savers and rewarded debtors by pushing down interest rates close to zero.  After all, who wants to buy a government savings bond if the interest rate is only 1 or 2%? 

We hear more critical voices questioning the long term wisdom of the Fed's zero-interest rate policy as fears of a new bubble are growing.   While skeptics abound, it seems now that Ben Bernanke will not permit the stock market to fall as it is too closely tied to the economic well-being of the US economy.    If the Fed continues QE3 and maintains low interest rates into the foreseeable future, then should we all just dump all our money into the stock market and forget about it?   Most people would agree that rule #1 of investing in the stock market is:  don't fight the Fed.  If they are lowering interest rates and keeping them low, then it makes sense to have money in stocks.   But markets are becoming very sensitive to possible changes in Bernanke's commitment to QE3 and ZIRP.   If unemployment should keep falling, then that would hasten the Fed's exit from the market since it has a target rate of 6.5%.   With Bernanke scheduled to make his latest pitch for the bubble economy this Wednesday (March 20), investors will be sensitive to any hint at all that the bond buying program may be winding down. 

But there is another potential warning bell that deserves our attention.   That is the rate at which investors are willing to buy US Treasuries, irrespective of Bernanke's machinations and manipulations.  Although the bond market has been distorted by the Fed's regular purchases, investors are still buying bonds at rates that broadly reflect the current level of risk and reward.  As long as these rates remain low, then Bernanke and his central banker friends are free to do whatever they want to keep the bubble inflated.  But as soon as rates start to rise, he will have a problem.  The massive debt levels in the US and Europe are only manageable as long as rates stay abnormally low.  The 10-year Treasury currently yields just 2% -- still very close to its historic low of 1.45%.   If these yields should start to rise towards 3%, then it may well be panic stations at the Fed, the ECB and indeed most central banks around the world.   It will be a sign that investors are getting nervous about the world's huge amount of debt and the inability of most nations to pay any of it back. 

US stocks rose for the fourth straight week last week as investors focused on more signs of a growing economy against a backdrop of Fed largesse.  The Dow gained about 1% closing at 14,514.   Indian stocks retreated, however, as inflation data came in a little on the high side thus weakening the case somewhat for a significant rate cut from the RBI this week.  The Sensex lost more 1% closing at 19,427.   I had taken a wait-and-see approach last week given the absence of any major short term aspects.  It is worth noting, however, that Monday was generally bullish worldwide on the Moon-Venus conjunction just as one would expect given the fact that both are benefic planets.  Tuesday was also more bearish as the Moon aligned with bearish Mars and Uranus.  I had also suggested that Friday leaned bearish given the opposition angle between the Moon and pessimistic Saturn.  This correlated nicely with the markets as we saw a small decline on Wall St. that day and a somewhat larger pullback in Mumbai.

The current rally in stocks may well continue until the end of March as Jupiter is set to make its exact aspect Pluto on March 29.  This will be the last exact Jupiter aspect for a while.  Without Jupiter in the mix, the market is more likely to experience problems since it is the bullish planet par excellence.  This is not to say that the market will be set to fall on March 30 but it is important to note that this positive influence will soon begin to recede. 

This week looks like a mixed bag as the early week looks dominated by a Mercury-Mars aspect in the early part of the week.  Since Mercury is barely moving after the conclusion of its retrograde cycle, this aspect has that much more punch and ability to inflict damage on sentiment.  This aspect is close to exact on Tuesday, the same day that the RBI makes its interest rate announcement.  By itself, I would say that the presence of this aspect does not make a significant rate cut (e.g. 50 points) more likely.  If anything, the mood may well be more cautious and anxious.   Bernanke is slated to speak on Wednesday after this aspect has begun to separate, so perhaps his remarks will fare somewhat better in terms of market reaction.  Friday's Mars-Uranus conjunction looks quite potent although the rest of the planets seem fairly positive.  I would therefore be reluctant to predict any significant disappointment after Wednesday's Fed meeting.  If anything, the market may well continue its upward march.

Transits for Tuesday 19 March 2013  9.00 a.m. Mumbai