With continued chaos and uncertainty in global markets, today KWN is publishing another incredibly important piece that was written by a 60-year market veteran. The Godfather of newsletter writers, Richard Russell, exposes the devastating truth about what the United States has been reduced to. He also discussed what is happening in major market as well as what investors should be doing with their own money right now.
Russell: “The US is now actually borrowing to pay off the interest on its huge and growing debt. The Treasury continually issues bonds. But who will buy them? Can you believe it, the US is reduced to actually buying its own debt via the Federal Reserve. What does the Fed buy our debt with? It buys our own debt with money that it conjures up out of thin air by means of a bookkeeping entry. The Fed has been doing this for years and the Fed’s basket of bonds is now over $4 trillion dollars worth of assorted bonds.
The continuing buying of bonds (QE), now $60 billion every meeting, has driven stocks up to overvalued levels. Companies are taking advantage of the lower rate environment in the limited period that these low rates are going to be around.
Now the Fed is trimming back its QE ($10 billion less at each meeting, so far) with the thought that QE will be completely removed by the end of the year — this on the hope that the US economy by year end will be strong enough to function on its own without any QE. After February’s report that more jobs had been created than predicted, the Fed’s plan to eliminate QE was strengthened.
As to valuations, the S&P 500 now trades at 16 times its component companies’ earnings for the past year. That is double its level of five years ago and almost identical to the level at which stocks topped out at the beginning of the decline in October, 2007. Nobel Prize winner Robert Shiller puts the S&P at 25 times average earnings, far above the historical average of 15.5.