"The real issue here now is, how fast
will this ugly festering sore explode?"
Why is this important? Well, if you have been tracking the behavior of stocks over the past few
years as well as the increases in the Fed's balance sheet, you know that stock markets have risen in direct correlation
with that balance sheet. In other words, THE
MORE PURCHASES THE FED MADE, THE HIGHER STOCKS CLIMBED.
I
have been saying it for years and I will say it again here - stocks are the worst possible “predictive” signal for the
health of the general economy because they are an extreme trailing
indicator. That is to say,
when stock markets do finally crash, it is usually after years of negative
signs in other more important fundamentals.
Of
course, whether we alternative analysts like it or not, the fact of the matter is that the rest of the world is psychologically
dependent on the behavior of stock markets. The masses determine
their economic optimism (if they are employed) according to the Dow and
the S&P and, to some extent, by official and fraudulent unemployment
statistics. When equities start to dive, society takes notice and suddenly
becomes concerned about fiscal dangers they should have been worried about all
along.
Well,
it may have taken a couple months longer than I originally predicted, but it would seem so far that a moment of revelation (that slap
in the face I discussed a couple
weeks ago) is upon us. In less than a few
days, most of the gains in global stocks for 2018 have been erased. The
question is, will this end up as a “hiccup” in an otherwise spectacular bull
market bubble? Or is this the inevitable death knell and the beginning of the
implosion of that bubble?
After I
predicted the election of Donald Trump, I also predicted that central banks
would begin
pulling the plug on life support for equities markets. This did in fact take
place with the Fed’s continued program of interest rate increases and the
reduction of their balance sheet, which effectively strangles the flow of cheap
credit to banking and corporate institutions that fueled stock buybacks for
years. Without this constant and ever expansionary easy fiat, there is nothing
left to act as a crutch for stocks except perhaps blind faith. And blind faith
in the economy always ends up being smacked down by the ugly realities of
mathematics.
I believe the latest extraordinary dive in stocks is NOT a “hiccup,”
but a sign that "contagion" is still a thing, and also a trailing
sign of instability inherent in our fiscal system. Here are some reasons why
this trend is likely to continue.
Historic
Corporate Debt Levels
As mentioned above, artificially
low interest rates have allowed corporations incredible leeway to manipulate
stock markets at will using stock buybacks and other methods.
However, there are still consequences for this strategy. For example, corporate
debt levels are now at historic annual highs; far higher even than debt levels just
before the crash of 2008.
If this doesn't
illustrate the falseness of the so called "economic recovery", I don't know what
does. Beyond that, what happens as the Fed continues to raise interest
rates and all that debt held by the "too big to fails" becomes vastly
more expensive? Well, I think we are seeing what happens. Over
time, faith in the corporate ability to prop up equities will erode, and a considerable decline is built directly into the farce.
Price
To Earnings Ratio
In
some of her final statements upon stepping down as the head of the Federal
Reserve, Janet Yellen had some choice comments about the state
of equities markets. These included statements that stock
market valuations were high and that the price-to-earnings ratio of the S&P
500 (the ratio of stock values versus actual corporate earnings per share) were
at a historical peak. This fits exactly with the policy shift I warned
about in 2017, and my assertion that Jerome Powell will be the Fed chairman to
oversee the final crash of the post-bailout
market bubble.
The spike in P/E
ratios is not only taking place in U.S. markets. For example, the same trend can be observed in
countries like India. Meaning, there
are equities valuation problems around the world.
The issue here is
that corporate earnings do not justify such high stock prices. Therefore, something else must be inflating those prices. That something
was, of course, central bank stimulus, and now that PARTY IS ALMOST OVER, whether the “buying of fine
dippers” want to admit it yet or not
10-Year
Treasury Yield Spike
Have spiking
Treasury bond yields actually been a signal for an “accelerating economy” as
mainstream economists often suggest? Not really. In the era of central bank
monetary manipulation, it is more likely that yields were spiking because
markets are anticipating the arrival of Jerome Powell as
Fed chair and accelerating interest rate hikes rather
than an accelerating economy.
The notion that the
economy itself might be “overheating” in 2018 is a rather new and nefarious
propaganda meme being used by central bankers to set a particular narrative. I believe that narrative will be the claim that “inflation” is a key
concern rather than deflation and that central banks must act to temper
inflation with more aggressive rate increases. In reality, what we are
seeing is not “inflation” in a traditional sense, but stagflation.
That is to say, we are seeing elements of price
inflation in necessary goods and services and well as property markets, but
continued deflation in the rest of the economy.
The Fed in
particular will continue to ignore negative fundamentals because they are
seeking to deliberately pop the market bubble they have created.
The spike
in 10-year bond yields seems to be correlating closely to the recent volatility
in stocks.
This volatility increased exponentially as yields neared the 3% mark, which
appears to be the magical trigger point for equities
failure. Though yields suffered a modest decline as stocks tumbled
this week, I still recommend keeping an eye on this indicator.
Dollar
Weakness
As I have mentioned in
recent articles, there has been a strange disconnect between interest rates
and the U.S. dollar.
As the Fed continues its policy of hiking interest rates, should generates the
dollar index rise in response. Instead, the dollar has
been swiftly falling, only stalling in the past couple of trading
sessions. If the dollar index continues to fall even
as stocks decline and rates increase, this may suggest
a systemic risk to the dollar itself.
Such risk could
include a dollar dump by foreign central banks in favor of a wider basket
of currencies, or the SDR trading basket created by the IMF.
Balance
Sheet Reductions Accelerating
The Fed's most
recent release of data on its balance sheet reduction program shows a drop in holdings of $18
billion; this is
far higher that the originally planned $12 billion slated by the Fed. Meaning, the Fed is dumping its balance sheet holdings much
faster than it
told the public initially.
WHY IS
THIS IMPORTANT?
Well,
if you have been tracking the behavior of stocks over the past few years as
well as the increases in the Fed's balance sheet, you know that stock markets
have risen in direct correlation with that balance sheet. In other words,
THE MORE PURCHASES THE FED MADE, THE HIGHER STOCKS
CLIMBED.
See Chart in the source of this art (above or below)
If this correlation is directly linked, then as the Fed reduces its
balance sheet, stocks should fall.
So, the fed
announces its latest round of balance sheet reductions on January 31st, the
reduction is much higher than anticipated, and within a week we
witness the largest two day market drop in years. You would think
this observation might just be important, but if you look at the mainstream
economic media, almost NO ONE is mentioning it. Instead, they are
searching for all sorts of random explanations for what just happened, none of
which are very logically satisfying.
I
believe that the Fed will not only continue its program of interest rate
increases even if stocks begin to flounder, but that they will also unload
their balance sheet as quickly as possible.
Corporate
Investor Comments
Major corporate
investment firms are beginning to raise their voices about the potential not
only for stock devaluations, but also the amount that they might fall. Sydney-based AMP capital
suggested a rather moderate 10% pullback in equities, which I think will
become the talking point for most of the mainstream media over the next couple
weeks. At least, until the whole thing comes crashing
down much further than that.
The head of Blackstone COO expects stocks to fall at least 20% this
year, a much more
aggressive number but not high enough in my view.
I still believe
these kinds of estimates are only applicable in the very short term. By
the end of 2018, it is possible that markets will double the worst estimated
declines predicted by the mainstream investment world given the
fundamentals.
Central
Banker Comments
Comments by agents
of the Federal Reserve reinforce the notion that the central bank is about to
crush the bull market bubble. San Francisco branch head Robert Kaplan has been
quoted as saying the Fed may be required to hike interest rates MORE than the
three times expected by mainstream economists in 2018.
As noted
above, Janet Yellen’s exit statements were decidedly “hawkish,” suggesting that
property markets and stocks are overpriced. On top of this, Jerome Powell, the new Fed chair,
has been quoted in Fed documents from 2012 (finally released this past month) discussing
the market bubble the Fed had created and the need to temper than bubble. In
other words, Powell is the perfect man for the job of
imploding stocks. Powell even predicted in 2012 that when the Fed raises rates the reaction by stock markets might
be severe. Interesting that markets would plunge the very first
day Powell assumes the Fed chair position.
I
suppose finally a Fed agent and I have something in common. We’ve both been
predicting the same exact market outcome caused by the same trigger event for
around the same number of years.
I outlined in great detail the plan for the “global economic reset” and
Powell’s role in overseeing the next stock crash in my article Party
While You Can - Central Bank Ready To Pop The Everything Bubble. In that
article, I predicted exactly the results which seem to be developing today in
equities.
In
essence, Powell is being portrayed by the mainstream media as “Trump’s guy,” and the change in Fed leadership is now
being referred to as “Trump’s Fed.” This is not
random rhetoric. I can't think of ANY other
president in the past that was given credit by the mainstream media for the
activities of the Federal Reserve. Trump’s control over the Federal Reserve is
zero. But, the actions of the Fed over the
course of this year will undoubtedly crash the very equities markets that
Trump has been foolishly taking credit for since his election.
The
real issue here now is, how fast will this ugly festering sore explode?
That’s
hard to say. I would not be surprised if markets fall
about 20% below recent highs in the course of the next couple of months and
then stall. We may even see a couple spectacular bounces in the near
term, all set to trumpets and fanfare by the mainstream economic media who will
proclaim that the latest shock-drop was nothing more
than an “anomaly.” Then, the crash will continue into the end of 2018
and panic will ensue.
That
said, if there is some kind of major geopolitical crisis (such as a war with
North Korea), then all bets are off. Stocks could crash exponentially over the
course of a few weeks rather than a year. As the past
few days have proven, stocks are not invincible, not in the slightest. And all
the gains accumulated in the span of years can be wiped away in an instant.
….
Source: https://www.zerohedge.com/news/2018-02-07/brandon-smith-massive-stock-market-reversal-upon-us
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