Early Investing

The Fed is Reflating the Bubble

The Fed is Reflating the Bubble
By Adam Sharp
Date June 12, 2020

This market is crazy. We’re in the middle of a severe economic crisis. The Nasdaq Composite index recently cracked the 10,000 mark for the first time and hit a new all-time high. Even the broader S&P 500 got back to even for the year before falling back.

And earlier this week something very strange happened. Bankrupt companies like Hertz, Whiting Petroleum, Pier 1, and JC Penney, all saw their shares jump higher for some reason.

Here’s how CNBC’s reported this unusual phenomenon.

Hertz, Whiting Petroleum, Pier 1 and J.C. Penney, which all declared bankruptcy amid the pandemic, saw their shares surging at least 70% each in Monday’s trading alone, some of which more than doubling.

As I write this, these bankrupt stocks are coming back down to earth (and are likely headed to zero). When companies declare bankruptcy, the common stock is usually wiped out. So it’s strange that they all soared so much to begin with.

These moves appear to have been driven by retail day traders. Such irrational market behavior is not a good sign. It means that stocks are once again being driven higher by the Federal Reserve, which is attempting to reflate the bubble.

Reflating The Bubble

It’s clear to me that the U.S. stock markets are experiencing a Fed-induced mania. The Fed has already lowered interest rates to near zero this year and pumped trillions of dollars into the economy. I don’t think it’s a coincidence that asset prices have soared in response.

And this week Fed Chairman Jerome Powell said they’re not even “thinking about thinking about raising rates” right now. And they don’t plan on raising rates until 2022.

This is a dangerous time for investors. We don’t know how long the Fed can keep markets elevated at such high prices. This bull run could go on for another year. Or it could have already ended.

The key thing for me is that this market move is not based on anything remotely fundamental. The economy is struggling. Profits are dropping. Yet prices are soaring. It’s a mania.

The market pulled back sharply on Thursday. The Nasdaq fell 5%. The S&P 500 fell almost 6%. And the Russell 2000 dropped more than 7%.

Many investors will instinctively buy the dip in U.S. stocks. But stocks are still very expensive. So I am being more cautious and am focused on precious metals (and miners), cash, startups, bitcoin and emerging markets.

Be careful out there. And try not to get caught up in any FOMO. Just because U.S. stocks have responded well so far to the Fed’s actions doesn’t mean they will do so forever.

Here’s some further reading about how the Fed can influence stock markets.

Good investing,

Adam Sharp

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