How near is the next bust?

Are we in bubble territory again?

The talk that financial markets have created/are creating another bubble has become louder and louder with every upward move of the Dow Jones Industrials and the Standard & Poor’s 500. We’re in uncharted, all-time high territory and that has increased worries that we’re about to see a replay of the busts of 2000 and 2007.

How worried should we be?

I think worries about the stock market, in particular the U.S. stock market, are over-stated at this point.

That doesn’t, however, mean that there aren’t parts of the financial market to worry about.

In particular I’m worried about parts of the fixed income market where traders and investors seem willing to overlook risk if they can just pick up a bit of yield. Read more

Why markets aren’t worried about inflation even as central banks flood the world with cash

It puzzles a lot of you I know from your emails and your posts on my sites. Frankly, it puzzles me. And I’d say that anyone who says this doesn’t puzzle them has more ego than sense.

The world’s central banks have flooded the global financial markets with cash—and they’re still hooking up more and bigger hoses. The Bank of Japan alone now promises to add $80 billion to the global money supply each month.

And yet there’s no inflation. There’s no sign of inflation. Investors aren’t afraid of inflation. And inflation hedges such as gold are sinking like a stone.

Does this make any sense?

Maybe.

You can find a potential key to unlocking this puzzle in The Vapors 1980 hit “I’m turning Japanese I really think so.”

Let’s start by trying to understand the logic of the Japanese market at the moment. Read more

It’s a central bank world–we just live (and invest) in it

Friday’s market action on the very weak U.S. jobs number—just 88,000 jobs created in March—put worries about U.S. economic growth on center stage.

At least in the short term.

What with earnings season highlighting companies’ growth for the first quarter and projected growth for the second quarter, and what with the Commerce Department set to release retail sales figures for March on April 12, I think it will be easy for the market to get caught up in growth worries and for the bulk of investors to start behaving as if growth were the most important issue facing the market.

Don’t go with the crowd. Recent numbers casting doubt on U.S. growth rates shouldn’t be ignored, but they haven’t changed the basic forces driving global financial markets.

This is still the central banks’ game. And currencies—the relative price of the dollar, the euro, and the yen—are still the most important mechanism for transmitting messages from the central bank to the markets.

If I’m right and this remains the central banks’ game, I’m looking for a strengthening dollar (and a weakening yen and euro) to continue to put downward pressure on the price of oil, copper and other commodities—and to continue the rout in gold.

U.S. economic growth does figure into this equation since weaker than expected U.S. growth will temper the boost that the dollar might otherwise deliver to Japanese and U.S. equities. Decent growth in the U.S. economy is likely to give the current rally more room to run.

But growth is really a sidebar to the main story.

Which isn’t to say that the story hasn’t changed at all. Read more

Everybody but the Federal Reserve

Big week for central banks ahead.

On Wednesday and Thursday, April 3 and April 4, the Bank of Japan meets for the first time under its new governor Haruhiko Kuroda.

On Thursday, April 4, the European Central Bank’s board of governors meets for the first time since the Cyprus bank bailout agreement.

Japanese stocks had rallied strongly since November on the odds that post the December election the Bank of Japan would raise its inflation target to 2% from 1% and announce an aggressive program to buy financial assets and weaken the yen. Last week I heard some doubters questioning whether new Bank of Japan governor Haruhiko Kuroda would be as aggressive in weakening the yen through a package of unlimited asset buying as the market was expecting. Those doubts led to a pull back in Japanese stocks that turned into a rout overnight with Tokyo’s Nikkei falling 2.12%.

I think today’s sell off on the lower than expected confidence numbers from the Bank of Japan’s Tankan survey should take those fears off the table. Whatever the Bank of Japan’s moves to date to weaken the yen and to raise inflation expectations, they haven’t been remotely enough. If Kuroda wants to put Japan on a new course—and I believe he does—he’s going to have to be more aggressive rather than less. On this weakness I’d be looking to add exposure to Japanese stocks such as Mitsubishi UFJ Financial Group (MTU), which I added to my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ last week.

The European Central Bank is likely to do very little of anything—again–on Thursday with the bank expected to leave its benchmark short-term interest rate at 0.75%. So words will count. Will central bank president Mario Draghi say anything to give hope to those in the EuroZone looking for more growth rather than just endless austerity? Will the bank speak to the increasingly dire situation in the EuroZone periphery economies where the interest rates on the bank loans that many small and medium size companies use to finance operations continue to run well ahead of rates in core EuroZone economies? And what, if anything, will Draghi say about plans for a EuroZone banking union (with unified regulation and deposit insurance) that took a bad beating in the Cyprus crisis? The euro was holding steady today at $1.2854.

Can the EuroZone debt crisis save the U.S. Federal Reserve?

As you watch another act in the euro debt crisis/farce unfold in Cyprus, please remember this:

The longer the euro debt crisis rolls on, the better the chance that the Federal Reserve will be able to shrink its balance sheet without cratering the U.S. economy.

Unfortunately for the Fed (but fortunately for people who live in Spain, Italy, France, etc.), it’s unlikely that the euro debt crisis will drag on and give the Federal Reserve all the time it needs.

But, hey, ya never know. European leaders have shown a remarkable ability to drag out the crisis with partial solutions that turn out, upon examination, not to be solutions at all. Maybe they can stretch the crisis out for another three or four years.

After all this is the group that has managed to turn what should have been a crisis for the off-shore money that stuffed Cypriot banks into a referendum on the survival of the euro. And that late Sunday night produced a “solution” to the Cyprus crisis that in the not-so-long run made the crisis in Spain, Italy, France, and, especially, Greece, worse.

Maybe there’s hope for the Federal Reserve—and the U.S. economy after all. At the least, the EuroZone debt crisis should give the Fed—and U.S. stock and bond prices—valuable support through September. Read more