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Trading  | February 8, 2018

Authored by Brandon Smith via,

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 “buy the f’ing 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, generally the dollar index should 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.

Image result for Fed balance sheet and Stocks 2017

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.

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