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New record for U.S.stocks…despite warnings

U.S. stocks trading at record highs

Olympians in Rio aren’t the only ones setting new records. The U.S. stock market did it again Monday.

The SP 500 hit an all-time high of 2,185.54 Monday morning, although it pulled back to end the day just a notch below Friday’s closing record. It’s another exclamation point in the incredible bounce back from the Brexit woes that sent global markets sliding in late June.

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Yet big time investors aren’t cheering the market’s gold medal performance. Instead, they say they’re “reluctantly bullish.”

Over the weekend, dozens of top investors and economists gathered at Camp Kotok in eastern Maine to discuss the state of the global economy and markets. The conference, organized by David Kotok of Cumberland Advisors, has been dubbed a mini-Davos.

The consensus view from Camp Kotok was: We’re living in incredibly scary financial times. The market will tank, but it won’t happen soon.

Related: U.S. emerges as safe haven amid chaotic world

The Fed is playing ‘Pokemoney’

Cheap interest rates, and ongoing problems overseas will keep the party going on Wall Street for now. U.S. stocks are overvalued, but they look better than the alternatives at the moment.

On top of that, both Hillary Clinton and Donald Trump are now talking about major cash injections for the U.S. economy. Clinton wants to spend billions on infrastructure, among other government initiatives. Trump says he’s spend twice as much as Clinton on roads and bridges, plus he’ll enact the largest tax cuts since President Ronald Reagan was in office.

All of those factors will likely push stocks higher in the coming months. But they also make the day of reckoning uglier.

The Federal Reserve is the heart of the problem. As one investor at Camp Kotok said, the Fed is playing a game of “Pokemoney” and the Fed has no idea how to end the game. Interest rates eventually have to return to something closer to normal (which means higher) and stock prices have to revert to their normal levels (which means lower).

Hardly anyone thinks the Fed will raise rates in September, and December is only about a 50/50 chance. The ongoing delay in hiking rates leads to another deeper concern among economists: Is the Fed losing control? The Fed isn’t supposed to pay much attention to markets, but lately the Fed appears to hesitate every time the market hiccups. And if there’s another big market or economic downturn, the Fed doesn’t have many tools left to intervene other than the scary prospect of negative interest rates.

Related: Good jobs news is good for stocks too

Watch Europe and Japan

The Fed saga will likely play out over many months, maybe even years. In the short-term, watch out for these two warning signs:

1. The break up of Europe. Brexit may have only been just the start. If other countries follow Britain’s lead and vote to exit the European Union — let alone the Eurozone — the whole European economy is in for a very grim realignment.

“This is the end of the European Union,” warns Jim Bianco, president of Bianco Research. He’s keeping a close eye on Italy’s referendum vote in October. Technically it’s a vote on possible changes to Italy’s constitution, but there are broader implications. Most Italians see it a lot like Brexit: a vote of confidence (or not) in the direction that Italy is moving in.

If Italians say they’ve had enough of the current leadership, it will be seen as another vote to give up on the EU.

2. It’s not just China. Watch Japan. Lately, China seems to have stabilized. The days of massive growth may be over, but the market is pricing in more of a “soft landing.”

All that could change quickly, warns Leland Miller, president of China Beige Book International. He’s keeping an eye on Japan as a potential trigger to upset markets. The efforts of the Japanese government to jumpstart the economy continue to fail.

If Japan’s currency, the yen, falls below about ¥85 to ¥90 yen to the dollar, it could start a major sell-off in Asia. Even worse, it might force China to start devaluing its currency again to try to ensure its goods remain even cheaper than Japan’s on the world markets.

At the moment, the yen is trading safely above ¥100, but events could align to change that this fall.

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