The stock market has been dropping quicker than I ever thought it would. Last weekend I was hopeful that the potential double bottom pattern on the charts that was there at the time would trigger, but it failed and now the market is broken.
I don’t have much to say about the market this morning, because it is poised to gap up and yet I see no sign of a real bottom. It is trading like past bear markets in gold stocks as I explained in this video I posted Thursday. My best guess is that the market will bounce for a few days and hold up into the end of next week and then have another final leg down for this decline – but even with this gap up the risks are to the downside even today.
Historically markets that tip over like this tend to fall 40-50% from their highs. You can see all the data in the book “This Time Is Different” or in Ray Dalio’s Big Debt Crisis. Both are available on Amazon and the latter is going to prove to be an extremely useful guide to understand not only what is happening, but how things will play out in the next next ten years. I highly recommend buying it and reading it.
A 40% drop would take the S&P 500 near 2000.
Yesterday Steve Liesman of CNBC broke what may be the story of his lifetime and that is that the Federal Reserve is beginning a new QE style $1.5 trillion dollar Treasury bond buying operation. If you read the details it amounts to a $500 billion a month operation. If you are wondering why the Federal Reserve and Treasury Department had been so silent earlier this week the reason why is that they were expecting this news to provide a big jolt to the market – no one expected it. I thought they would cut rates first and then do something like this much later.
All it did though was enable the market to go up for about 30 minutes yesterday afternoon, but then it simply sold the news and continued lower.
Now once the Federal Reserve lowers rates to zero or near zero it will be completely out of bullets. And that’s why the stock market sold the QE operation news.
This is a historic announcement though. You need to understand the real reason the Federal Reserve did this. Yesterday I did a post showing how the corporate bond market had not only topped out, but has been falling sharply this week to cause stress for companies and stocks across the board.
By keeping interest rates for so low for so long for years the Federal Reserve enabled companies to take on so much debt that there is now a debt bubble that ha peaked. The process of creating this debt enabled corporations to borrow money to buy stocks and make them go up over the past six years, but now that game is over.
More importantly the Federal government now has a trillion dollar deficit too. And now interest rates are so low that it makes no sense for a normal human being to buy Treasury bonds. Look how low the yields are.
Those are the interest rates you get for Treasury bonds. I was talking with someone a few days ago and told them that these rates made no investment sense for a human being. Why would anyone want to lend money for ten years and not even get a percent on their money? I asked this person who is going to buy these bonds if human beings won’t do it?
He didn’t say anything in response to my question, but yesterday we got the answer.
The Federal Reserve itself will!
The announcement yesterday marks the beginning of the monetization of government debt.
We are in the first chapter of the start of financial turmoil in the United States.
It’s a three chapter book.
Chapter one is short and consists of a story of stock market wipe outs ending in sorrow for many, but for some lessons learned and later applied to turn a losing game for them into a winning game. Hopefully it is almost over.
Chapter two is about how money printing to pay off debts creates inflation and drives inflation, commodities, and gold higher.
Chapter three is one about how the American people deal with it all. I have no idea how that will play out.
But I know what we need to do – we need to nagivate the situation and part of that is to understand the importance of what the Federal Reserve announced yesterday.
This is a fluid market now when things are happening so fast we have to be on top of them now almost all of the time – even on the weekends. I’m lining up an interview with Ike Iossif of marketviews.tv today that I will send to you tomorrow.
And things are getting to the point where we can’t just keep thinking about how far things will drop, but how and when to buy. I will be spending all day tomorrow thinking about that for an update Sunday for Power Investor members.
-Mike
