Below is a point and figure chart. Point and figure charts were how stock market analysts looked at securities in the late 1800s through the 1940s versus the typical charts that we are used to seeing today. Today’s charts are time and value-based, where point and figures are looking at the direction. To get a sense of time, you can refer to the bottom of the chart and see the two digit year. Months are referred to by numbers in the charts. So, the number one is January in a given year, and October through December is the letters A, B, and C respectively. Point and figure charts have ascending columns of X’s and declining columns of O’s.
The chart below is the bullish percentage on the NASDAQ stock exchange. The chart tells us the percent of stocks on the NASDAQ trading in a bullish (upward) direction. We can see:
- In March 2000, at the peak of the dotcom bubble, the percent of stocks on the NASDAQ trading in an upward direction was 50%.
- Currently, the percent of stocks on the NASDAQ trading in an upward direction is 64%. Pretty scary considering how much worse off the global economy truly is.
- The snapback high from the dotcom bust was 77% in 2003.
- The snapback high from the 2008 credit crisis was 75% in 2009.
It makes me uneasy to think that the NASDAQ rose to be the largest stock market bubble ever with only 50% of the stocks trading in an upward trend, and today we sit at 64%. My unease arises from the reality that the Federal Reserve has been patting itself on the back for the performance of the Russell 2000 stock index, which is a measure of small-cap US stocks; most of those stocks trade on the NASDAQ. The implication I am making is that the Fed’s easy money policy, since 2003, is creating distortions in global investments. Why else would we see an epic bubble in the NASDAQ with only 50% of the stocks trading upward, and now with zero interest rates, easy money and bailouts, we see a much higher percent of stocks trading upward, but not reaching those 2000 pricing levels? One of those distortions appears, from the above chart, to be pushing stocks beyond true valuations. Consider the Fed’s track record according to the following quote from the must read book Currency Wars from James Rickards:
“Ed Koch, the popular mayor of New York in the 1980s, was famous for walking around the city asking passersby, in his distinctive New York accent, “How’m I doin’?” as a way to get feedback on his administration. If the Fed were to ask, “How’m I doin’?” the answer would be that since its formation in 1913 it has failed to maintain price stability, failed as a lender of last resort, failed to maintain full employment, failed as a bank regulator and failed to preserve the integrity of its balance sheet. The Fed’s one notable success has been that, under its custody, the Treasury’s gold hoard has increased in value from $11 billion at the time of the Nixon Shock in 1971 to over $400 billion today. Of course, this increase in the value of gold is just the flip side of the Fed’s demolition of the dollar. On the whole, it is difficult to think of another (quasi) government agency that has failed more consistently on more if its key missions then the Fed.”
The references Mr. Rickards makes are detailed as follows:
Failed to maintain price stability – The value of a 1913 dollar has declined by 95%. Put another way is to say that it takes $20 dollars today to buy what $1 dollar bought in 1913.
Failed as lender of last resort – In the depths of the Great Depression, 10,000 banks in the US were closed or taken over. The Fed did not lend money freely to solvent banks that were struggling with staggering demands for cash. In 2008, the Fed reacted to the problems in US banking as if liquidity was a problem, when in-fact, many banks were insolvent due to excess leverage (debt) and bad investments. Insolvent banks should have been shut down or nationalized. Instead, bad banks were propped at the taxpayers’ expense.
Failed to maintain full employment – The Humphrey Hawkins Full Employment Act in 1978 added unemployment to the Fed’s mandate. The idea was to keep unemployment at 3% or less. Unemployment has only been as low as 6.3% in 2003.
Failed as bank regulator – The Financial Crisis Inquiry Commission created in 2009 stated the following – “We concluded that this crisis was avoidable. The prime example is the Federal Reserve’s pivotal failure to stem the flow of toxic mortgages which it could have done by setting prudent mortgage lending standards. The Federal Reserve was the one entity empowered to do so and did not…
Failed to maintain the integrity of its balance sheet – The Fed is a bank and maintains a balance sheet of assets and liabilities. The net worth (assets – liabilities) is approximately $60 billion, but has assets of near $3 trillion. Of the $3 trillion in assets, quite a bit of it is less than desirable considering the junk collateral that was parked at the Fed from the insolvent banks.
So, considering the lack of success of the Fed in defined mandates, I could be excused for thinking one should be very careful with stocks, and very happy if you own precious metals.
Do you have an investment strategy that seeks to protect your portfolio against volatile economic conditions? Call me to schedule a free review of your current investment portfolio – 913.402.6099.
John P. Chladek, MBA, CFP® is the President of Chladek Wealth Management, LLC, a fee-only financial planning and investment management firm specializing in helping families and couples who are not yet retired realize their financial goals. For more information, visit http://www.chladekwealth.com.
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