The cycle since 2009 has been different from other market cycles throughout history in only one significant manner. Global central banks have intentionally pushed interest rates to zero and below. This has encouraged investors to speculate in the equity markets which have now become dangerously overvalued.
A byproduct has been a historic expansion of public and private debt burdens with equity market overvaluations that rival only those of the 1929 and 2000 extremes on reliable valuation measures. These brazen experimental policies, of central banks have amplified the sensitivity of the global financial markets to economic disruptions and distortions of value.
It is clear that a zero interest rate policy has encouraged yield-seeking speculation by investors. Monetary easing in and of itself does not support financial markets. Easy money merely stimulates speculation; investors become more inclined to embrace more risk. The actions of the Federal Reserve's aggressive easing will fail to prevent a market collapse.
Financial professionals with an understanding of how securities are priced should know that elevating the price that investors pay for financial securities does not increase aggregate wealth. A financial security is nothing but a claim to some future set of cash flows. The actual wealth is embroiled in those future cash flows and the value-added production that generates them.
Every security that is issued must be held by someone until that security is retired. Therefore, elevating the current price which investors pay for a set of future cash flows simply brings forward investment returns that would have otherwise been earned later on. The Fed is leaving poorly-compensated risk on the table for the future.
The total debt of the United States has reached gigantic proportions well beyond 2008
The crisis ended precisely when, in the second week of March of 2009, the Financial Accounting Standards Board (FASB) responded to Congressional pressure and changed rule FAS157 to remove the requirement for banks and other financial institutions to mark their assets to market value. The stroke of a pen eliminated any chance of widespread defaults by making balance sheets look financially stronger. The new balance sheets may be great, in the short-term, but ultimately have become weapons of "mass destruction".
The Race to Debase Continues
The U.S. economy added a disappointing 151,000 new jobs. This eliminated the possibility of a Fed funds increase; however, do not be surprised if some Fed officials emerge to say otherwise, as we are already experiencing some counter-intuitive moves within several markets.
The true unemployment rate is U6, which includes discouraged job seekers and marginally attached workers and people who are working only part-time for economic reasons. The U6 rate more accurately reflects a natural, non-technical understanding of what it means to be unemployed. It provides a better picture of the underuse of labor within the country. The current U6 rate is close to 10%. That's down more than 6 percentage points since 2010, but higher than it was in 2001.
In short, the incredible bull market that has lasted since 2009 is nearing its end. The Fed's easy money policies, stock buyback programs and accounting rule changes have masked most of the current, serious financial problems.
Eventually, all these tactics to cover up these problems will start to fail. Once they start failing, things will get worse quickly for the economy and for those who don't know how to profit from market weakness.
This article is commentary by an independent contributor. Chris Vermeulen is full-time trader and research analyst for TheGoldAndOilGuy Newsletter.