What Credit Markets Are Telling Us About Stocks Now

Rather than trust markets to heal themselves, the world’s central banks have polluted markets with flawed economic theories and trillions of dollars of debt. Rather than ignite economic growth as they had hoped, however, they have suffocated the global economy.

It began with the U.S. Federal Reserve’s move to lower interest rates to zero seven years ago, followed by several bouts of quantitative easing.

This was followed by Mario Draghi’s August 2012 declaration to do “whatever it takes” to defend the euro.

And then there were the Bank of Japan’s kamikaze moves last Halloween to buy not only every Japanese Government Bond being sold, but even stocks and ETFs.

China is late to this central banking party, but it still managed to rock global markets last week when it devalued the yuan.

Central banks have launched a massive assault on markets that has sucked out their liquidity and distorted normal pricing mechanisms beyond recognition. What we’ve seen so far is only a taste of what central banks will do in their desperation to prop up over-indebted economies…

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Shelter from These Storms in the Distance

In South Florida, we call the dog days of summer the “mean season,” as vicious thunderstorms move over the Everglades every afternoon and attack the east coast with lightning strikes and blinding downpours. We keep our fingers crossed that the storms won’t morph into hurricanes that can sweep the ocean over the land and cause catastrophic destruction.

After a period of intense hurricane activity in the early 2000s, it’s been ten years since we’ve been hit by any serious storms, and we are being told that strong El Nino conditions will likely protect us again this season. But we know that sooner or later our luck will run out, and we will be back in the eye of dangerous winds and storm surges. And, at least for a moment, we’ll wish we lived somewhere other than in paradise.

Stock market investors are experiencing similar feelings after a six-year hiatus from reality, courtesy of the U.S. Federal Reserve. Paradise is starting to give way to a very mean season…

The Dow Jones Industrial Average experienced its longest losing streak in four years, falling for seven trading days in a row. The Dow lost 1.79% on the week to close at 17,373.38 and has lost 1,000 points since its May 19 high of 18,312.39. The Dow is now down 2.52% on the year. Other indices are holding up better. The S&P 500 lost 1.25% to close at 2,077.57 and is now up 0.91% on the year, while the Nasdaq Composite Index lost 1.65% to close at 5,043.34 and is up 6.49% year to date.

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