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The Daily Reckoning

Never surrender: Fed fights failure with more of the same

The current policy of quantitative easing has had the opposite effect from what was intended, but the Fed is staying the course.

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The US bond market could be signaling that it is headed the way of Greece, Ireland, and Lehman Bros. Who wants an IOU from someone who can’t pay it back? Once the selling begins, it is hard to stop. Interest rates go up, increasing the cost of financing for the debtor. Pretty soon, he can no longer fund his on-going expenses or make the payments on his debt. He is forced into bankruptcy.

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Meanwhile, the latest numbers from Robert Shiller tell us that the US stock market is 33% overvalued. Our guess is that stocks will go down much more than that number implies. Markets tend to overshoot in both directions.

And the latest news from China tells us the Middle Kingdom could blow up at any time. Nearly half the GDP is spent on capital improvements (usually things that involve concrete and steel). It’s breathtaking to see it. But there’s no way you can make that many capital investment decisions without making some colossal blunders.

And from Europe comes a bleak and foreboding assessment: European banks have five times as much government debt as they did 3 years ago…and even US banks have nearly $350 billion worth of debt from Europe’s wave-washed periphery. Investors are selling off Spanish bonds; another chapter in the debt crisis could be at hand.

Dear reader, you are faced with a grave and dangerous situation. In front of you is the Valley of Death for investors.

America’s stock market could crash at any moment. Its bonds are slipping. Its homes are sinking. China could collapse into a heap. Europe could come unglued. Trade could fall off a cliff. Interest rates could rise everywhere. Another great depression could be coming soon.

And yet, CEOs are optimistic, says one report. Investors are overwhelmingly bullish, says another. And your captains are telling you to “charge ahead!”

Our advice: Take cover!

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