Blog Archives

These Are Not Signs of a Healthy Market

The implicit narrative of the latest rally in stocks is that this is just another normal rally in the ongoing 10-year long Bull market. Nice, but do these three charts look “normal” to you? Let’s take a quick glance at a daily chart of the S&P 500 (SPX), a weekly chart of TLT, the exchange-traded fund of the US Treasury 20-year bond, and silver.

In other words, let’s look at three different assets: stocks, bonds and one of the precious metals.

Even the most cursory glance reveals there is nothing normal about any of these charts. The recent action in the SPX is anything but normal: yet another announcement of yet another (low-level nothing-burger) trade meeting opens a gap big enough for a semi to drive through, punching through the upper Bollinger Band, and on the heels of a previous big gap up, also on no fundamental news.

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Is the Stock Market Now “Too Big to Fail”?

Correspondent Bart D. recently speculated that the U.S. stock market was now “too big to fail,” that is, that it was too integral to the global financial system and economy to be allowed to fail, i.e. decline 40+% as in previous bubble bursts.

The U.S. stock market is integral to the global financial system in two ways.Now that investment banks, pension funds, insurers and multitudes of 401K retirement plans are dependent on current equity valuations, a crash would impair virtually the entire spectrum of finance from hedge funds to banks to insurers to pension plans.

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4 Factors Signaling Volatility Will Return With A Vengeance

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In this article, renown financial system critic and best-selling author Nomi Prins identifies the 4 brewing risk factors that are swiftly propelling us into a new era of higher and more unpredictable price volatility in the financial markets.
The relative stability of the past half-decade is over, and those with capital invested in the system ignore the arriving turbulence at their peril.
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Stocks and Bonds Are Due for a Generational Crash of 75%

From the point of view of history, a reversion to generational lows is inevitable, and a valuation level around 50% of GDP for stocks is a fair target.

If we look back to 1981 valuations of stocks and bonds as a guide to valuations at the next generational low, we find stocks and bonds are due for a 75% drop. The Great Bull market in bonds and equities took off after 1981, and has run higher for 34 years (notwithstanding a spot of bother in 2000-02 and 2008-09).

Before credit bubbles became the New Normal, the stock market was valued at less than 50% of GDP. Now stocks are valued at over 200% of GDP, as are bonds. Together, the total securities valuation is over 400% of GDP:

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Wedges and Triangles: Big Move Ahead?

The central bank high is euphoric, the crash and burn equally epic.

Just out of curiosity, I called up a few charts of key markets: stocks (the S&P 500), volatility (VIX), gold and the U.S. dollar (UUP, an exchange-traded fund for the dollar). Interestingly, all of these charts displayed some version of a wedge/triangle.

In a wedge/triangle (a formation with many variations such as pennants), price traces out a pattern of higher lows and lower highs, compressing price action into the apex of a triangle as buyers and sellers reach an increasingly unstable equilibrium.

As price gets squeezed into a narrowing band, the likelihood increases that price will break out of the triangle, either up or down, in a major move.

So which way will these markets break–up or down?

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Are Capital Inflows Propping Up U.S. Markets?

It seems likely that significant capital inflows are helping prop up asset valuations in the U.S.

Nobody really believes the official narrative that the “recovery” is powering the remarkable strength of U.S. stocks, bonds and real estate. The real Main Street economy is quite obviously struggling, outside the energy and Federal government sectors, and so many see the Federal Reserve’s free money for financiers (a.k.a. quantitative easing) bond and mortgage-buying programs as the real reason bond yields have declined and stocks have soared.

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The Happy Story of Boomers Retiring on Their Generational Wealth Is Wrong

This happy story is wrong on multiple counts.

The conventional view of the Baby Boomers’ retirement is a happy story: since we’re living longer and remaining productive longer, Boomers will not be as much of a burden on Gen-X and Gen-Y as doom-and-gloomers assume.

Not only are Boomers staying productive longer, they will draw upon their vast generational wealth as they age, limiting the financial burden on younger generations.

This happy story is nicely summarized in this lengthy piece 
The Fear Factor:
 
Long-held predictions of economic chaos as baby boomers grow old are based on formulas that are just plain wrong.

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The Generational Short Part 2: Who Will Boomers Sell Their Stocks To?

Those who see the current era as the New Normal also have one logical action: sell now at the top and wait for the smoke to clear in 2016.

In The Generational Short: Banks, Wall Street, Housing and Luxury Retail Are Doomed, I addressed how generational changes in values could affect the stock market. That values change over time is common sense, and so is the idea that values drive choices about purchases, debt and investments that ultimately influence stock valuations.

The implicit conclusion: the Baby Boomers won’t have anyone to sell their stocks, real estate and bonds to. 

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Dow 40,000, SPX 4,000: Is this Fed-Fueled Stock Rally Sustainable?

Since stocks rise when the Fed is adding assets and tank when the Fed pauses…

Now that financial pundits are claiming the current stock market rally is good to go until 2016, it’s appropriate to see where the market will be in 2016 if current trends hold.

Let’s start with the well-known correlation between the Federal Reserve’s balance sheet and the stock market: stocks rise when the Fed is adding assets and tank when the Fed pauses. (Chart courtesy of STA Wealth Management)

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Courtesy of Market Daily Briefing, let’s look a little closer at the Fed’s ballooning holdings of home mortgages (MBS) and Treasury bonds, and extend those trends into the future:

 

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By mid-2016, the Fed will have nearly doubled its Treasury bonds from $2.16 trillion to over $3.5 trillion, and its mortgage holdings will double from $1.44 trillion to $3 trillion. This would represent about a third of total mortgages outstanding.

Here is the Fed’s aggregated balance sheet, with the start of each quantitative easing (QE) program indicated:

usfed-sum12-13a

Grab a ruler and pencil and extend this trendline–you reach about the same target of Fed assets $6.5 – $7 trillion by 2016:

Fed-assets12-13

If the S&P 500 (SPX) continues higher in lockstep with the Fed’s expanding balance sheet:

SP500-12-13a

Is that SPX 4,000 in 2016, or is it SPX 5,000? The upward trendline is so steep it’s hard to project.

Is this uptrend sustainable? You’re kidding, right? Don’t fight the Fed, Baby–it’s Dow 40,000 or 50,000/SPX 4,000 or 5,000 by 2016, guaranteed.

Please note this is sarcasm, not a forecast.

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