Despite quantitative easing, markets may crack

Markets continued to be volatile last week as investors remained concerned about rising interest rates.

Bill Fleckenstein thinks that “cracks have appeared” in bond markets, particularly Japan's.

The bottom line, I believe, is that Japanese authorities have “lost the bond market” (i.e., rates are much higher than authorities want, despite their best efforts) and the Fed has as well, but, perversely, Japan may be further along in the process, even though its powers that be started much later to really get serious about QE-powered monetary debasement.

If quantitative easing cannot keep bond prices up and yields down, then stocks could be negatively impacted too.

Indeed, John Hussman reminds us in his latest article that history shows that Fed easing does not guarantee a rising market.

One of the most strongly held beliefs of investors here is the notion that it is inappropriate to “Fight the Fed” – reflecting the view that Federal Reserve easing is sufficient to keep stocks not only elevated, but rising. What’s baffling about this is that the last two 50% market declines – both the 2001-2002 plunge and the 2008-2009 plunge – occurred in environments of aggressive, persistent Federal Reserve easing.

It’s certainly true that favorable monetary conditions are helpful for stocks, on average. But that average hides a lot of sins.