Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
S&P 500 – Is a 5% Correction Enough? - 6th Dec 21
Global Stock Markets It’s Do-Or-Die Time - 6th Dec 21
Hawks Triumph, Doves Lose, Gold Bulls Cry! - 6th Dec 21
How Stock Investors Can Cash in on President Biden’s new Climate Plan - 6th Dec 21
The Lithium Tech That Could Send The EV Boom Into Overdrive - 6th Dec 21
How Stagflation Effects Stocks - 5th Dec 21
Bitcoin FLASH CRASH! Cryptos Blood Bath as Exchanges Run Stops, An Early Christmas Present for Some? - 5th Dec 21
TESCO Pre Omicron Panic Christmas Decorations Festive Shop 2021 - 5th Dec 21
Dow Stock Market Trend Forecast Into Mid 2022 - 4th Dec 21
INVESTING LESSON - Give your Portfolio Some Breathing Space - 4th Dec 21
Don’t Get Yourself Into a Bull Trap With Gold - 4th Dec 21
GOLD HAS LOTS OF POTENTIAL DOWNSIDE - 4th Dec 21
4 Tips To Help You Take Better Care Of Your Personal Finances- 4th Dec 21
What Is A Golden Cross Pattern In Trading? - 4th Dec 21
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - Part 2 - 3rd Dec 21
Stock Market Major Turning Point Taking Place - 3rd Dec 21
The Masters of the Universe and Gold - 3rd Dec 21
This simple Stock Market mindset shift could help you make millions - 3rd Dec 21
Will the Glasgow Summit (COP26) Affect Energy Prices? - 3rd Dec 21
Peloton 35% CRASH a Lesson of What Happens When One Over Pays for a Loss Making Growth Stock - 1st Dec 21
Stock Market Sentiment Speaks: I Fear For Retirees For The Next 20 Years - 1st Dec 21 t
Will the Anointed Finanical Experts Get It Wrong Again? - 1st Dec 21
Main Differences Between the UK and Canadian Gaming Markets - 1st Dec 21
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - 30th Nov 21
Omicron Covid Wave 4 Impact on Financial Markets - 30th Nov 21
Can You Hear It? That’s the Crowd Booing Gold’s Downturn - 30th Nov 21
Economic and Market Impacts of Omicron Strain Covid 4th Wave - 30th Nov 21
Stock Market Historical Trends Suggest A Strengthening Bullish Trend In December - 30th Nov 21
Crypto Market Analysis: What Trading Will Look Like in 2022 for Novice and Veteran Traders? - 30th Nov 21
Best Stocks for Investing to Profit form the Metaverse and Get Rich - 29th Nov 21
Should You Invest In Real Estate In 2021? - 29th Nov 21
Silver Long-term Trend Analysis - 28th Nov 21
Silver Mining Stocks Fundamentals - 28th Nov 21
Crude Oil Didn’t Like Thanksgiving Turkey This Year - 28th Nov 21
Sheffield First Snow Winter 2021 - Snowballs and Snowmen Fun - 28th Nov 21
Stock Market Investing LESSON - Buying Value - 27th Nov 21
Corsair MP600 NVME M.2 SSD 66% Performance Loss After 6 Months of Use - Benchmark Tests - 27th Nov 21

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.


© 2005-2019 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