Fire in the hole!
Jackson Hole, that is…
The Federal Reserve Bank of Kansas City decided to start holding its “Economic Symposium” at the quiet mountain resort in Wyoming to lure ex-Fed chair Paul Volker to their conference. The rumor was Volker was an avid fly-fisherman, and Jackson Hole has some of the best damn fishing around…
It worked, and now the conference is one of the biggest market movers in global economics today.
Typically, these meetings have serious implications for the stock market. Former Fed Chair “Helicopter Ben” Bernanke turned these Jackson Hole speeches into full-fledged global market movers. Just have a look at what happened after each of his speeches there:
- 2007: Bernanke stated that the Fed “stands to take additional actions” to stabilize the market. The Dow shot up 119 points.
- 2008: Bernanke mused that interest rates would stay near zero. The Dow jumped 197 points.
- 2010: Bernanke hinted that QE2 was on the way, citing the Fed’s willingness to try “unconventional measures”. The Dow went up 164 points. Investors that bought in immediately following the speech banked 20% returns over the rest of the year.
- 2011: Bernanke didn’t even lay out anything tangible, he simply hinted that unemployment was too high, and the Fed would do what it could to try and fight it. How did the Dow react? By rising 134 points…
That’s why Janet Yellen has been carrying the nickname of “Fairy Godmother of the Bull Market”. We’ve just gotten used to reaping massive gains after every one of these meetings. But after Yellen gave her first Jackson Hole address as Fed Chair last Friday, the market didn’t know what to do…
But the market may be all tapped out of that Bernanke Magic…
Now, I seriously doubt Yellen was fly-fishing, but she was clearly fishing for something. It seems to me that she was fishing for answers that didn’t seem to exist.
In her speech, “Re-Evaluating Labor Market Dynamics” she basically stuck to her guns, but did acknowledge that while the stock market is riding all-time highs, the labor market is still stuck in the muck. She cautioned against making any sudden moves. According to one strategist, “She gave everybody a bone and didn’t commit herself to anything that the market hadn’t already considered.”
Here’s a rundown of the main talking points from “the Hole”:
- Interest rate hikes are somewhere on the horizon, but that horizon is awfully blurry. Yellen warned policymakers to tread carefully before raising rates. In typical bloodless economist jargon, she said “Monetary policy must be conducted in a pragmatic manner that relies not on any particular indicator or model, but instead reflects an ongoing assessment of a wide range of information in the context of our ever-evolving understanding of the economy.”
- Yellen admitted that while some statistics show encouraging job growth, the labor market at large is still in trouble. “Five years after the end of the recession, the labor market has yet to fully recover.”
- People that are employed have seen a pitiful increase in wages. “Over the past several years, wage inflation, as measured by several different indexes, has averaged about 2 percent, and there has been little evidence of any broad-based acceleration in either wages or compensation.”
When it comes to the labor market, she did hint at some of the wounds festering underneath these rosy job numbers. After rattling off excuses that the labor force had been decimated by baby boomer retirement, disability claims, and school enrollment, she hit the main nerve of this so-called recovery: worker discouragement.
“Profound dislocations in the labor market in recent years–such as depressed participation associated with worker discouragement and a still-substantial level of long-term unemployment.”
When I think of “profound dislocations”, I think of my arm being ripped out of the socket… not a tepid job recovery. So there was some truth behind the cold economic lingo. Let’s have a look at how “dislocated” Americans are when it comes to getting a decent job…
Let’s start with how much we’re getting paid in comparison to other “recoveries”:
It doesn’t take an economist or statistician to decipher that chart. We’re simply not making nearly enough money. I can’t blame “discouraged workers” for not wanting to work for sub-par wages. While companies are posting record stock prices, they are doing so on the back of an underpaid, exploited workforce.
It’s plain to see that CEOs and shareholders are coming up roses because the middle class is the manure making those roses grow:
- Before the crash in 2007, the average household in the top 5% of earners had 16.5 times as much wealth as the average U.S. household. Now the top 5% has 24 times as much wealth as the average overall household.
- Almost half of all Americans can scrounge up $400 in emergency funds without either borrowing it, or selling off assets — like say, your blood, your car, or your house.
- The top 20% of U.S. households watched their income grow by an average of $8,358 a year from the crash until 2012. The lowest 20% of earners? They witnessed a $275 decline per year. And that is data right from the Bureau of Labor Statistics.
I’m not making an anti-one-percenter argument here. I am all for smart, dedicated people making money. What I am saying is this is far from a holistic recovery. Main Street has never been so far from Wall Street. So when I see Wall Street cheering that stocks are at record highs, I scratch my head and wonder: Did the Fed just sell out the rest of us for Wall Street?
Well, according to one Fed insider, that was exactly the point…
Andrew Huszar was an architect of the Fed’s quantitative easing program. He has called QE “the greatest backdoor Wall Street bailout of all time.”
But after the market reaction to the Yellen speech, that bailout might have run its course. The Fed will probably start to wind down the QE program in October and, barring any major catastrophes, I think we’ll see interest rates start to rise sooner rather than later.
So when Yellen eventually does pull the plug and interest rates return to reality, what will happen? According to Huszar, we’ll see a flood out of equities….
“We heard these very same words being uttered in 2007, 2008…I don’t know what the next crisis will look like, but I believe that we do have this potential for pretty significant selloffs in the financial markets. Again, people need to be very careful about their investment strategies and really hold things they have confidence in terms of longer term.”
If we take a look at what happened after the last crash, we can glean some lessons about crash investing.
Precious Metals
Before the QE really kicked Wall Street back into bubble mode, precious metals blew up big time. SPDR Gold Shares (NYSE: GLD) ran up 103% from 2009 to 2011. The iShares Silver Trust (NYSE: SLV) skyrocketed 258% during the same time.
We are always proponents of having some silver, gold, platinum, and palladium in the mix as hedges. But in times of market turmoil, these investments turn from hedges to windfalls.
Get in before the crash.
Blue Chip Stocks
I am a huge fan of the buy low, sell high philosophy – like anyone else with a functioning brain. You simply cannot get better long-term stocks at fire-sale prices as you can right after a market melt down.
Here are a few winners from the last crash:
- Mastercard (NYSE: MA) is up 297%
- General Electric (NYSE: GE) is up 270%
- McDonald’s (NYSE: MCD) is up 80%
Pick a few of your favorite blue chips and sink some money into them, especially if they have a good dividend. They’ll pay off big in the long term, with minimal risk.
Index Funds
A simple index fund is the single easiest way to profit from a market crash. For example, $10,000 in the Dow Industrial right after the 1987 crash would be worth more than $137,000 today! If you invested in a Dow Index after the crash in 2008, you’d be sitting on a 156% windfall!
After the crash hits, take a look at a cheap index fund like the Vanguard S&P 500 (NYSE: VOO). It’s up 69.3% over the last five years. When the market has nowhere to go but up, an index fund is a no-brainer.
The long and the short of it is that Janet Yellen is the “Fairy Godmother of the Bull Market” because the entire recovery is a fairy tale. And if we are to believe the underlying fundamentals, this fairy tale will not have a happy ending.
Make sure you write your own fairy tale ending before it’s too late…
