Weekend Edition: Billionaire fund manager: 'The market is rigged'

 Federal Reserve Chairman Ben Bernanke spooked investors on Wednesday...

 

Bernanke's announcement that the Fed would continue its purchases (and continue monitoring the "improving" economy for a tapering point) should not have surprised anyone... It shouldn't have sent markets tumbling as it did. The Fed's continued currency manipulation has some of America's most successful investors complaining...

 

 Bill Gross – co-CEO of PIMCO and manager of the world's largest bond fund – is a longtime skeptic of Bernanke and his policies. And he believes Bernanke's views of the economy are simply wrong. He told Bloomberg:

 

Based on what [Bernanke] said, based upon what the Fed estimates have given us in the last hour it suggests that yes, towards the end of the year, as we hit 7.25%, and if inflation rises as opposed to [staying] at 1% that the Fed would begin to taper and that ultimately they would end tapering in perhaps the first quarter of 2014. Is that a realistic possibility? At PIMCO, we don't think that really is.   We think the chairman and the Fed are taking a very much of a cyclical type of view. He blames lower growth on fiscal austerity and expects towards the end of the year once that is gone, all of the sudden the economy will be growing at 3%. He blames housing prices moving up on homeowners that simply like higher home prices as opposed to emphasizing the mortgage rate, which is really what has provided the lift in the first place.   To certain extent his driving analogy, which he talked about pulling back on the accelerator, I think he might be driving in a fog. I think the Fed itself may be driving in a fog. To think that is a cyclical as opposed to a structural problem in terms of our economy. I simply think, and PIMCO thinks, that real growth to lower unemployment below 7% is a long shot over the next six, 12, 18 months.

 The financial blog Zero Hedge recently published an interview billionaire fund manager Stanley Druckenmiller gave to a Goldman Sachs research publication. In it, Druckenmiller admits the Fed has confounded his ability to read the market...

 

It has become harder for me, because the importance of my skills is receding. Part of my advantage is that my strength is economic forecasting. But that only works in free markets, when markets are smarter than people.   That's how I started. I watched the stock market, how equities reacted to change in levels of economic activity, and I could understand how price signals worked and how to forecast them. Today, all these price signals are compromised, and I'm seriously questioning whether I have any competitive advantage left.   Ten years ago, if the stock market had done what it has just done now, I could practically guarantee you that growth was going to accelerate. Now, it's a possibility. But I would rather say that the market is rigged and people are chasing these assets, without growth necessarily backing confidence. It's not predicting anything the way it used to and that really makes me reconsider my ability to generate superior returns.   If the most important price in the most important economy in the world is being rigged, and everything else is priced off it, what am I supposed to read into other price movements?

Always remember... We're playing in a rigged market. And history tells us this current experiment – the greatest monetary expansion in history – can't last.

 

 It's that rigged market that Porter believes has created conditions that will result in a big bond market collapse. In the latest issue of his Investment Advisory, out a week ago, Porter said he believes the top in bond prices is here. And he says the taper risk could be part of the reason so many economic indicators are pointing to a top in the bond markets – high-yield bond prices are crashing, mortgage real estate investment trust (REIT) prices are falling, and Treasury bond prices are declining for the first time since the European crisis in 2011.

 

But Porter believes something much bigger is actually happening. As he wrote...

 

With the Fed threatening to reduce its spending and legal challenges mounting to the ECB's buying, there's now a real risk that the prices of financial assets, especially bonds, will decline. Fears of this decline might be all that's driving the recent market action we outlined above...   But... what if there's something more going on? Recent events in Japan suggest that the markets may be reacting to something far more dangerous.   What if the world's central banks were to lose control of the paper money system? What if the world's leading sovereign governments become so highly indebted that no one is willing to hold their obligations, not even their own citizens? What happens if the governments whose obligations form the foundation of the world's monetary system were to be rendered not only bankrupt, but actually insolvent?

 Over his career, Porter has proven to be especially prescient when it comes to calling tops... He correctly called the collapse of Fannie Mae and Freddie Mac... and General Motors. He predicted the housing and banking collapse. He warned subscribers of the risks in Europe before the economy fell apart.

 

And today, he says we've returned to crisis conditions in the U.S.

 

 Whether the crash comes tomorrow or in the next two years, you need to start preparing. At the very least, you need to own physical gold and silver. We repeat: Own physical metals. And as Porter explains, make sure it's real, hold-in-your-hand physical bullion, and not some paper receipt or investment that claims to represent a share of some gold somewhere...

 

When this house of cards finally collapses, the holders of dollars, euros, and yen will suffer a giant wipeout. Gold, the currency central banks cannot print, will double, maybe even triple in price. That's why I encourage everyone to hold a large allocation of gold. But take your position soon...   Contrary to popular perception, the supply of real gold is vanishing – quickly.   Millions of people, perhaps even you, are "buying" gold investments without ever seeing, holding, or possessing this gold in any way. This enables companies to sell gold in the form of certificates and shares for which the actual bullion doesn't really exist.   Mark my words: In the next few years, scandals will erupt all around the world. It's going to send shockwaves through the industry. "Share" gold investments like exchange-traded funds could get hit hard, whether they really have the gold to back up their shares or not.

 But owning gold is only the first step you should take to protect you and your family from the coming crash. This is the big one... Unlike in 2008, the Federal Reserve has exhausted all ways to "solve" the problem... Interest rates are already at zero. And the Fed has been pumping trillions of dollars into the economy for the past five years.

 

 One of the most controversial things we've ever written at S&A is that Social Security is a Ponzi scheme.

 

Many people get very upset when we write it... but sadly, the evidence keeps mounting that Social Security is bankrupt...

 

The program taxes current workers to support retired workers... but the system will soon run out of cash.

 

A recent report shows just how close to the edge we are...

 

According to the Social Security Board of Trustees, the Social Security disability insurance trust will be completely depleted by 2016. This dire situation led the trustees to state in their summary that "more far-reaching legislative measures are required to maintain the solvency of Social Security relative to Medicare."

 

In other words, expect some more major changes to come in the near-term. According to consumer financial services firm Bankrate, one expert has even testified to Congress proposing the minimum age to start collecting Social Security be raised from 62 to 64.

 

 Will this idea be approved in Congress? We have no idea. Social Security is often referred to as the "third rail" of American politics... because suggesting changes can be fatal to a politician's career.

 

Regardless of how things play out... It's clear you cannot and should not rely on government largesse to secure your retirement. And saving money in tax-advantaged accounts is critical... Because whatever solution is found... you can be sure your tax bill will go up as a result. There's no other choice.

 

That's why last week, we hinted at one of the best ways to grow your money tax-free. Your money grows much faster than it does in long-term CDs... You can take it out any time without penalty. And you don't need to report it to the IRS.

 

Our colleague Tom Dyson first brought this to our attention. Tom spent a full year researching before trying out this idea. Now it has become his single-largest position, with 20% of his family's wealth now in this account. Unfortunately, only one American in 1,500 has this account. We hope you'll take the time to learn more about it...

 

Tom has put together a presentation to share what he's learned about this investment for free. You can watch this video here.

 

Regards,

 

S&A Research