Money Is Money, Wherever It Comes From - John Rubino

One of the crucial things to understand about today’s world is that money is fungible. Whether it’s created in Japan, Europe, China or the US, once it’s tossed by a central bank into one or another part of the global economy, it eventually finds its way to a common pool of liquidity.

So the modest US tightening of the past year (100 basis point increase in the Fed Funds rate, slight decrease in Fed balance sheet) has to be seen in a global context. And that context is still insanely easy. Here, for instance, is China’s “social financing” – their term for total new debt:

This chart is in Chinese yuan, so it’s not immediately clear just how much borrowing is taking place. But converting to dollars yields a monthly average of about $250 billion, or $3 trillion per year. That’s a ton of new debt, much of which generates demand for raw materials from other countries, thus exporting Chinese inflation to the rest of the world.

The European Central Bank is, if anything, even easier. Here’s a brief excerpt from Doug Noland’s latest Credit Bubble Bulletin – which as usual should be read in its entirety by anyone who wants to understand today’s monetary insanity.

ECB chair Mario Draghi: “Inflation is not where we want it to be, and where it should be. We are still confident that it will gradually get there, but it isn’t there yet, and that’s why the Governing Council reiterated that the present very substantial monetary accommodation is still necessary…Now, the last thing that the Governing Council may want is actually an unwanted tightening of the financing conditions that either slows down this process or may even jeopardise it; and that’s why we retain the second bias, or let’s call it, reaction function. ‘If the outlook becomes less favourable or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, we stand ready to increase our asset purchase programme in terms of size and/or duration.’ And I think the Governing Council has given enough evidence that when flexibility is needed to achieve its objectives, it has been very able to find all that was needed. So that’s why we keep this bias.”

If central banks have become so keen to protect markets from risk aversion, why shouldn’t the cost of market “insurance” remain extraordinarily low. Why wouldn’t speculators gravitate to products fashioned to profit from providing myriad forms of market risk mitigation (hawking flood insurance during a drought)? And, importantly, as Bubble risks escalate, why would sovereign yields around the globe not discount the high probability that central banks will at some point be called upon to make good on their New Mandate – i.e. respond to faltering Bubbles with aggressive new QE programs with enormous quantities of bonds/securities to purchase?

Meanwhile, in Japan, a couple of central bank governors who are reportedly skeptical of hyper-easy money resigned and were replaced by people who were the opposite of skeptical:

Bank of Japan newcomers back 2% price goal(Globe and Mail) – The two new members of the Bank of Japan’s policy board said on Tuesday that the central bank should continue efforts to achieve its 2 per cent inflation goal and it was premature to debate an exit from its massive monetary stimulus. Goushi Kataoka, a 44-year-old former economist at Mitsubishi UFJ Research and Consulting and an advocate of massive money printing, said he wants to see the price goal achieved quickly although he cannot say when that can be.

The other new board member, Hitoshi Suzuki, a 63-year-old former deputy president of Bank of Tokyo-Mitsubishi UFJ, who is well-versed with financial markets, said it was “dangerous” to markets to debate an exit from the stimulus now.

“There’s a considerable distance from the 2 per cent target. From my own experience of dealing with markets for 20 years, starting a debate on exit now would be dangerous to markets,” Suzuki told a joint news conference.

He added that the price target was a high goal but he wants to achieve it by any means.

Here’s the recent increase in the BoJ’s balance sheet – which is another way of saying the amount of money the bank has created and released. Note that it has more than doubled in three years:

So what does all this mean? Here’s Noland’s conclusion:
There is no doubt that central bank liquidity backstops have promoted speculation, securities leveraging and derivatives market excess/distortions. I also believe they have been instrumental in bolstering passive/index investing at the expense of active managers. Who needs a manager when being attentive to risk only hurts relative performance? And the greater the risk associated with these Bubbles – in leveraged speculation, derivatives and passive trend-following – the more central bankers are compelled to stick with ultra-loose policies and liquidity backstops.

After all, who will be on the other side of the trade when all this unwinds? Who will buy when The Crowd moves to hedge/short bursting Bubbles? This is a huge problem. Central bankers have become trapped in policies that promote risk-taking, leveraging and hedging at this precarious late-stage of an historic Global Bubble. These days, central bankers cannot tolerate a “tightening of financial conditions,” and they will have a difficult time convincing speculative markets otherwise.

- Source, John Rubino

Stock Bubbles, Propaganda And The Deep State

The markets continue to tick higher, despite the fact that the world is now more unstable than it has ever been in recent history. The deep state battles and attempts to dethrone President Trump, while the MSM issues propaganda piece after propaganda piece. What comes next?

- Video Source

Killing the Goose That Laid the Golden Egg

I’m frequently asked by Americans how long I think the “recovery” will take. From my point of view, the answer is obvious, but then, I don’t spend my evenings watching American news programmes that have, since 2010, been endlessly claiming that a genuine recovery is right around the corner.

It would seem logical to me that when the news anchor who cried wolf (claimed the imminence of recovery over and over with no result) proved to be either exaggerating, or just plain misinformed, my faith in him, his programme and his network would diminish considerably.

But, what if all the news anchors on all the programmes on all the networks claim that a recovery is unfolding? Surely, there must be truth in the claim.

Unfortunately, no.

To be sure, there are some indicators that imply increasing confidence, such as a rising stock market and reports of new jobs being created. However, rather than take these reports on face value, we find that, since 2008, governments have been buying up stocks and even the companies themselves have been buying back their own stocks. In both cases, this has been done to give the appearance of a recovery, to hopefully trigger an actual recovery. It hasn’t worked.

And, if we hear a report that the number of barmen and barmaids has increased significantly, this is not a sign of renewed prosperity, but rather a sign of diminished hope. (In the Great Depression, the numbers of purveyors of alcohol increased, as well. When people are confident, they drink. When they’re worried, they drink more.)

So, are these “indicators” evidence of a decline? Well, no, but neither are they evidence of a recovery. In attempting to predict the future of America’s economy, we should not look to peripheral symptoms, but tofundamentals.

So, then, let’s have a look.

For decades, American wages have risen above those of most other countries, making American goods more expensive without necessarily being better. Also, more and more people have been promoted on seniority than ability, causing inventiveness to lag. At the same time, state and federal regulations have expanded dramatically, creating a web of red tape and stumbling blocks that slowed production, increased the cost of production and, in some cases eliminated production. To ice the cake, the corporate tax rate was raised to 38.9%. (The worldwide average is 22.5%. Only Puerto Rico has a higher rate than the US.)

There’s an old saying that business goes where it’s most welcome and, of course, that means that both production of goods and money itself can be expected to do the same. As such, for quite some time, American manufacturers have built factories in other countries, where costs and regulations are more favourable than the US. In addition, they’ve outsourced both production and services to companies overseas. Understandably, these forward-thinking manufacturers have gained the greatest market share in the US, as they’ve had the lowest prices and the greatest profits. The condition has existed long enough that very few of America’s most essential goods are actually produced in the US.

More to the point, these industries are unquestionably not coming back. On the American news, much is being said about “making America great again” and a significant component of that concept is intended to be the return of American business.

This is all well and good for political rhetoric, but for businesspeople, “once bitten, twice shy.” A token return may be implemented by some American companies seeking favour from their government, but a true return will not take place unless the fundamentals change. Literally thousands of recent regulations must be rescinded and governments are loath to rescind what they see as their power base. In addition, a major number of these regulations are based upon perceived environmental and humanitarian needs. The pressure to maintain these perceptions will not be going away and neither will the voters who support them.

More importantly, the American public are unquestionably not going to accept the idea that their wages need to be lowered dramatically in order for them to regain competitiveness. As it is, whatever advances they’ve enjoyed in recent decades have been swallowed up by an increased cost of living that has not kept pace with wages.

Of course, when we observe American news programmes, these fundamentals are not even discussed, yet they’re at the heart of any recovery, if one is possible.

To make matters worse, the US is now the foremost debtor nation the world has ever seen. The petrodollar and the dollar as the reserve currency are both on the ropes.

When one country prospers beyond the level of its competitors, it’s due to productivity. Whoever builds the better, cheaper mousetrap gets the cheese. When the reverse is true - when a country goes into a decline due to uncompetitive wages and excessive regulations and taxes, political leaders never suggest a true solution – sweeping elimination of regulations, major lowering of taxes and dramatic cuts in wages. On occasion, token attempts at the former two are undertaken, but the latter is never even mooted. If it were, the villagers would storm the castle with torches and pitchforks. For this reason, no country ever reverses such a decline. It instead continues to decline until it crashes.

And yet, although jobs are increasingly being lost in the US, major companies closing down their retail outlets and many industries are operating on the smallest of margins, the golden goose that was America’s exceptional long run of prosperity is still excitedly running around the farmyard. This gives the impression of a vibrant economy, but it is instead the final run of a dead goose.

At present, the US retains much of the appearance of its former glory. It still displays its military might. And the public are not yet aware that the world has begun to dump US treasuries back into the system, precipitating the necessity for a debt default by the US. But, as the dollar loses its power, as it’s presently in the throes of doing, it will no longer be possible to repay debt or to fund the military.

Just as it’s true that a bird may often run around excitedly when its head has been chopped off, an economy tends to do the same. The reason for this can be found in one word: confidence. Confidence tends to remain until the general public grasp the reality of the collapse. It’s only when they realise that the economic jig is up that they freeze their spending. The golden goose then falls to the ground.

This is not a new situation. It’s occurred countless times in world history. However, for many westerners, it’s the first time they’ll witness it first hand, on their own soil and, in their experience it will be the first time. Those who see it coming and prepare themselves will be those who fare best when it comes to pass.

- Source, Jeff Thomas

Overnight Paper Attack On Gold: Why This One Was Different

Once again there was an overnight “flash crash” in Comex gold futures trading. This time it occurred at 3:56 a.m. EST at one of the quietest trading periods of the roughly 23 hour electronic trading day. India has gone sleep. The Shanghai Gold Exchange has been closed for about 90 minutes and the London markets are just beginning to function. I guess someone decided it was a good time to unload close $500 million worth of paper gold into the Comex’s Globex electronic trading system (click to enlarge):

The graph above is the Comex August paper gold derivative, sometimes referenced as a “contract.” The $500mm million number is from Zerohedge and likely includes all the contract months. At exactly 3:56 EST a clearly motivated seller decided it was the best time to unload 2,741 August pieces of paper gold, driving the market down $4.50 instantaneously. If the gold were actually physically delivered into the buyer, that chunk would be 274,100 ozs, or roughly $360mm worth of gold. It’s doubtful that amount of gold is actually sitting in the Comex “registered” vaults (yes, I know what is allegedly reported to be in the vaults).

INTERESTINGLY, the very next minute, some entity BOUGHT 2,373 August paper gold contracts, nearly offsetting the amount of contracts sold. That’s why the price snapped right back up. Also interesting is the fact that the apologists on behalf of those manipulating the paper gold market were dead silent as to the source of this large sell – i.e. there were not any reported “fat finger” excuses.

The question I have is whether or not the flash crash sale was perpetrated to induce the hedge fund black algos to mechanically sell, assuming stop-losses were triggered, to enable the buyer to buy 2,373 contracts at a lower price. We know for sure, based on the recent COT reports, that the bullion banks are feverishly covering their short position, with the bank swap dealers now net long gold. Concomitantly, we know the hedge funds are dumping longs and going short.

Unfortunately, whoever decided to implement this operation strategically executed it one day AFTER the reporting cut-off date for Friday’s COT report. It’s a neat little maneuver the bullion banks have doing for years as a method of covering up their “tracks in the snow.” It will be impossible to analyze what occurred overnight when the COT report a week from Friday is released. The “winds” will have blown snow over the tracks.

That said, it certainly feels like there’s real buyers of gold and silver accumulating positions at these levels. I know from looking at the data on a daily basis that the Indians are actively importing gold currently. For now, it looks like the General Sales Tax “boogieman” was a non-event. China is actively buying, albeit it’s somewhat seasonally slow on the SGE.

What is of interest, at least to me, is the fact that the market has a bullish tone in what is normally one of the slowest seasonal periods of the year. In another month the Indians will be gearing up for their peak buying period. Also of note is that fact that U.S. retail coin buyers have ramped up their appetite considerably for silver eagles and, more of note, for some reason India is importing silver right now in unusually large quantities. I have not been able to track down a link yet, but yesterday Reuters referenced an article in the Economic Times hard copy edition titled, “Silver Imports May See Three-Fold Rise as Low Price Drives Demand.”

- Source, Dave Kranzler

More Bad News About Pensions: Be Your Own Central Bank

We just published our latest review of the ongoing pension funds collapsing and must have inspired ZeroHedge as they are reporting this morning a much gloomier forecast than we had previously imagined.

These thieves in corporate America, managers of state and local government pension funds and social security can no longer hide their incompetence and blatant theft.

Here’s the opening to the article we published on July 19:

We write about pension funds a lot. The theft of our pensions and retirement savings is, not only, an ongoing situation, the “big one” is on the horizon and seems to be approaching the apex for millions upon millions of people.

As reported by ZeroHedge July 21:

We spend a lot of time talking about the public pension crisis because, well, it’s a massive $5 – $8 trillion dollar overhang on the economy and one which will undoubtedly result in some heartache for investors at some point in the future. Unfortunately, there are some problems that are too large for even U.S. taxpayers to fix and, with an underfunding of $52,000 (mid-point) per household, somehow we suspect this is one of them.

Of course, our nation’s various governmental institutions aren’t the only ones to have unwittingly created massive ponzi schemes from which there is no escape. In fact, as Bloomberg points out today, as of the end of 2016 over 90% of the top 200 corporate pensions in the S&P were unfunded to the tune of $382 billion.

Here’s a look at the funded status of the top 20:

Meanwhile, just the top 20 corporate pension funds are underfunded by over $100 billion. 

As you can see, the pension problem is far larger than is being discussed. This situation should be front and center on a daily basis as the impact upon millions and millions of Americans is going to be devastating. The deadstream media is just about silent on the subject as it would paint a picture of reality and, well, that’s not their job. They can only push lies, deceit and propaganda to keep the public ignorant and continuing to “punch the clock” to feed the beast.

If you don’t believe these companies are stealing our wealth then please explain why Catherine Austin-Fitts would make this comment:

Since 1947 we have progressively had a more out of control hidden system of financing, black budget, that has grown increasingly dependent on fraud and financial fraud and narcotics trafficking, organized crime. We’ve literally created an out-of-control model that is so far outside the Constitution. Nobody cared about that as long as they were getting their check.

****

This means that your house and my house and our property and retirement savings are on the table and the $40 TRILLION has been stolen since the early 1990’s is off the table. Then guess what, there’s a giant sucking sound coming out of our pension funds, our retirement funds and our personal assets in order to balance the budget . Source

I can’t think of a better time for a person to consider becoming their own central bank. In 2009 when I removed all of my funds from a company sponsored 401k it cost me approximately 25% of my savings in taxes and fees. This was 100% recovered within three years. As most people understand, taxes will be higher tomorrow than they are today and the tax savings alone would probably mean a person would be way ahead of a collapsing pension program.

With several options to move one's pension, 401k/IRA or retirement savings into an LLC or other sanctioned account it may be time to explore these options.

- Source, Rory Hall

Mish on Gold and the Fed

Mish Shedlock with Gordon T. Long delve into Gold and the details of the Fed and other Central Bankers shenanigans and say's the assets bubbles will pop. Gold is doing very well in light of it all and will continue to do so.

- Source

The Global Impact of Central Bankers

Peter Atwater left behind a distinguished investment banking career to build his financial consulting operation and he has spent the best part of the past decade examining the role of confidence in markets. The biggest challenge is to understand when the market has reached its top as well as knowing when things have hit the floor and in this interview, Peter explains why some investors are psychologically better equipped to handle it than others.

- Source, Real Vision Television

The Smart Money Are Buying Gold and Silver

The Gold and Silver Freight Train looks to be leaving the station. All the bankers games will come to an end and when the tsunami of buy orders come it will blow them out of the water. But they knew that day will come thats why they hold it.

"The physical precious metals bid will go infinite — that is, big players holding useless cash will buy up all the gold and silver that’s available, at pretty much any price that’s demanded."

- Source, Zero Hedge

Trump Jr. Treason – NOT, Russian Lawyer Worked for Democrats

There is still no there there with the Russian collusion story in its latest version featuring Donald Trump Jr. This looks more like an episode of “Punk’d,” but there is no crime and no treason according to renowned lawyer Alan Dershowitz. What this really is all about is a fight between good and evil. It’s that simple. The Deep State and the MSM are doing everything they can to destroy Trump and his team. This is why President Trump held a prayer meeting at the White House where ministers laid hands on him in a prayer circle.

Breitbart.com is out with a new story about how the Russian lawyer at the center of the Donald Trump Jr. Russian collusion hype has a long history of working with Democrats. Attorney General Loretta Lynch gave Natalia Veselnitskaya a “special” visa extension in 2015. The question is why? The other question is how many traps are going to be set and debunked before the Deep State and the MSM accept that Donald Trump is the rightful elected President of the United States.

Fed Head Janet Yellen says the Federal Reserve may not raise rates much more, but that might not be enough to keep them from spiking when the Fed unloads its balance sheet of all the “toxic” mortgages it bought in the 2008 financial meltdown. Gregory Mannarino of TradersChoice.net says the Fed will not allow rates to rise because it would melt down the financial markets—again.

- Source, USA Watchdog

Hitting Rock Bottom: When There’s Nothing Left to Lose

"In the suite, on the news – Everybody dog food – Bang, bang shot dead – Everybody’s gone mad. All I wanna say is they don’t really care about us. […] Jew me, sue me, Everybody do me. Kick me, don’t you black or white me. [ Source]"

When I first heard these words it seemed like a sea-change had taken place in the individual who had first spoken them. When someone usually speaks of dancing, having fun and how wonderful the rainbow and unicorn parade is going it gets my attention when they begin to see the world anew. Dominique Strauss-Kahn (DSK), former head of the International Monetary Fund, was scheduled to make a presentation the day after his arrest in New York for the alleged rape of a chambermaid. Sexual crimes are one of the most effective tools the oligarchs use to destroy careers and fire the emotions of the general public. The general public, who barely have time to get to their second or third part-time job, only hear and see what the mainstream media tells them to believe and when it is a sexual crime this hits an emotional level that sparks anger, fear and hatred all at the same time. Mission accomplished; career destroyed. Once you take a look at what was actually happening, in the context of the allegations being thrown around, there is usually a lot more to the picture than meets the eye. 

According the Guardian:

But the alleged attempted rape of a chambermaid by Dominique Strauss-Kahn in a plush Manhattan hotel suite last month may also have compounded Europe’s year-long currency crisis, with the fate of the euro and the continent’s big banks hinging on how – and if – Greece can be saved from sovereign default for the second time in a year. As intense bargaining continued behind the scenes over Europe’s response to the escalating Greek turmoil, the Guardian has learned that the change in leadership at the top of the International Monetary Fund last month also brought an abrupt shift in IMF style and policy on Europe’s bailout of Greece. [emphasis mine]

The reason DSK was made to appear as a monster is he was the center of attention regarding the monetary future of the Greeks, the Euro currency and Europe’s role in bailing out Greece. Apparently, DSK had ideas that conflicted with the ruling oligarchy of Europe and had to be destroyed on the world stage. It turns out, some time later – long after the public has convicted DSK of sex crimes – he was acquitted of all charges. The person, who wrote the opening words in this article, was also accused of sexual crimes. Not just rape, but pedophilia. His career wasn’t just ruined it was utterly destroyed and he was made out to be an even bigger monster than DSK. Instead of being acquitted, which I feel confident that we would have been, he died under unusual circumstances and the person responsible for his death was never charged with any crime. How very convenient. Our world is in the midst of change unlike anything before. The Federal Reserves’ hijacking of the global economy, by way of the U.S. Dollar, the endless un-Constitutional wars, waged by the Pentagon and the warmongers, is beginning to take it’s toll on the people of this planet. This is to say nothing of the ever unfolding enslavement of humanity by a handful of oligarchs. The battered souls that are rising up to say “no more” are seeing their owners in the appropriate light – the dark light of corrupt, career politician/criminals. Just look at how the Republican party is attacking Republican Presidential candidate, Donald Trump and the Democratic party is attacking Democratic Presidential candidate Bernie Sanders. The oligarchs are fighting back, as we knew they would. Using the weapons of propaganda, as described above, technology of every type imaginable, combined with the useful idiots that make up the police state, are the current set of tools being used against us. This phenomenon is not confined to one country nor even a particular region; it is global.
Beat me, hate me, you can never break me. Will me, thrill me, you can never kill me. [Source]

It seems that more and more people are buying into these words. The mask is coming off the established career criminals within the U.S. government. Everyday we hear of more and more people attending Trump’s Presidential campaign rallies, Sanders' Presidential campaign rallies and questioning Hillary's record. The stench is rising and the people don’t like what they have been fed for the past 50+ years by these career criminals. They didn’t start out as career criminals; they began their life of crime as public servants, a politician, I believe most wanting to do something good for their community, their state and their country. The power corrupted their thinking and, more importantly , their actions. These embedded ticks/leeches that are attempting to suck the last few drops of life from their victims are being outed. The victims are awakening and seeing these criminals for what they are – criminals. When does a person finally begin to see the light of truth? For a great many people, if not 100% of the people, it is when they have hit rock bottom. When an alcoholic hits bottom he knows it, he can feel in his soul that he has been defeated by something that has taken complete control of his life. This is what has happened to the people who are turning out in droves at Trump and Sanders Presidential campaign rallies. These people are broke, enslaved and pissed. More importantly they are seeing how they arrived at this station in life. Not because they are lazy or ignorant, because they have been sold down the river by the people they trusted to represent them. It turns out, these people are not worthy of trust and the only interests they represent are their own.
Tell me what has become of my rights? Am I invisible because you ignore me? Your proclamation promised me free liberty! I’m tired of being the victim of shame; throwing me in a class with a bad name! I can’t believe this is the land from which I came!! You know I really do hate to say it The government don’t wanna see[Source]

As more and more people hit rock bottom and come to realize the man behind the curtain is nothing more than a scared little boy/girl, they will begin to use their great voice, great strength and return the rule of law to the once proud nation. We are all victims of the ruling and banking class’ crimes. It is time we stand together and let these criminals know, we see you, we laugh in your face and we are the ones that have the power.

"Beat me, bash me, You can never trash me. Hit me, kick me, You can never get me. [Source]"

Have you hit rock bottom or is the little boy/girl behind the curtain still pulling the strings? Just like an alcoholic, only the individual can decide where the bottom lies and whether it has been hit.

- Source, Rory Hall via Sprott Money

Ronald Stoferle and Jim Rickards Discuss the Current Outlook for Gold

Jim Rickards discussed with Ronald Stöferle and Mark Valek the key topics of the new In Gold We Trust Report 2017.

The key points debated were:

• Introduction – monetary surrealism – and where we stand
• Shadow Gold Price
• White Gray and Black Swans (esp. recession in the US)
• Populism and its true Cause
• De-Dollarization: Good-bye Dollar, Hello Gold (including the interview with Judy Shelton)
• A Coming War with North Korea
• Bitcoin and its Dangers

- Source

Ron Paul: Stocks to Crash 25 percent, Gold Up 50 Percent by October

A painful correction is coming and there's little that can be done to prevent it, according to former Republican congressman and libertarian firebrand Ron Paul.

Speaking to CNBC last week, the former GOP presidential contender argued the economy is not as strong as Wall Street consensus believes, and the situation could turn ugly as soon as October.

"If our markets are down 25 percent and gold is up 50 percent it wouldn't be a total shock to me," said Paul recently on "Futures Now."

That scenario would drag the S&P 500 Index as low as 1,819, and gold as high as $1,867 an ounce from current levels.

Paul, who's also a medical doctor and former U.S. Representative from Texas, is a well-known bear who has been sharply critical of Trump administration. He has also been putting a lot of blame on the Federal Reserve for keeping interest rates historically low for so long.

Although the Fed is undertaking a rate hike campaign after nearly a decade of ultra-accomodative monetary policy, some believe asset prices—and the economy—could still react badly.

"I think it's a very precarious market, and the Fed better be very careful. Since they are incapable of knowing what to do, I don't expect much good to come out of anything they do," said Paul. "There are so many mistakes made out there that the correction is almost unlimited."

This is not the first time Paul has called for a pullback on "Futures Now."

He made a similar prediction almost exactly a year ago on June 28, 2016, almost exactly a year ago. Since then, the S&P 500 has ripped by 21 percent and the Dow is up 24 percent, breaking several records along the way. The tech heavy Nasdaq bounced into record territory over that time period, and soared 34 percent.

However, Paul still makes the case that the rally is on borrowed time.

"People have been convinced that everything is wonderful right now and that stocks are going to go up forever," Paul said.

"I don't happen to buy this. The old rules always exist, and there's too much debt and too much mal-investment. The adjustment will have to come," he added.

- Source, CNBC

Stock Markets Hyper Risky – Zeal

History extensively proves that stock markets are forever cyclical, no trend lasts forever. Great bulls and bears alike eventually run their courses and give up their ghosts. Sooner or later every secular trend yields to extreme sentiment peaking, then the markets inevitably reverse. Popular greed late in bulls, and fear late in bears, ultimately hits unsustainable climaxes. All near-term buyers or sellers are sucked in, killing the trend.

This mighty stock bull born way back in March 2009 has proven exceptional in countless ways. As of mid-June, the flagship S&P 500 broad-market stock index (SPX) has powered 262.7% higher over 8.3 years! Investors take this for granted, but it’s far from normal. That makes this bull the fourth-largest and second-longest in US stock-market history! And the few superior bull specimens vividly highlight market cyclicality.

The SPX’s biggest and longest bull on record soared 417% higher between October 1990 and March 2000. After it peaked in epic bubble-grade euphoria, the SPX soon yielded to a brutal 49% bear market over the next 2.6 years. The SPX wouldn’t decisively power above those bull-peaking levels until 12.9 years later in early 2013, thanks to the Fed’s unprecedented QE3 campaign! The greatest bull didn’t end well at all.

The second-largest bull was a 325% monster between July 1932 to March 1937. But that illuminated the inexorable cyclicality of stock markets too, as it arose from the ashes of a soul-crushing 89% bear in the aftermath of 1929’s infamous stock-market crash. The third-largest bull was 266% from June 1949 to August 1956, which we’ve almost surpassed. And even that post-WW2 boom was followed by another bear.

All throughout stock-market history, this binary bull-bear cycle has persisted. Though some bulls grow bigger and last longer than others, all eventually give way to subsequent bears to rebalance sentiment and valuations. So stock investing late in any bull market, which is when investors complacently assume it will last indefinitely, is hyper-risky. Bear markets start at serious 20% SPX losses, and often approach 50%!

Popular psychology in peaking bull markets is well-studied and predictable. Investors universally believe “this time is different”, that some new factor leaves their bull impregnable and able to keep on powering higher indefinitely. This new-era mindset fuels extreme euphoria and complacency, with memories of big selloffs fading. Investors’ hubris swells, as they forget markets are cyclical and ridicule any who dare warn.

To any serious student of stock-market history, there’s little doubt today’s stock-market situation feels exactly like a major bull-market topping. All the necessary ingredients are in place, ranging from extreme greed-drenched sentiment to extreme near-bubble valuations. If this bull was merely normal, the risks of an imminent countertrend bear erupting to eradicate these late-bull excesses would absolutely be stellar.

But the downside risks in the wake of this exceptional bull are far greater than usual. That’s because much of this bull is artificial, essentially a Fed-conjured illusion. And that was even before the incredible recent Trumphoria surge in the wake of Trump’s surprise victory! Back in early 2013 as the SPX was finally regaining its previous bull’s peak, the Fed unleashed its wildly-unprecedented open-ended QE3 campaign.

Understanding the Fed’s role in fomenting this anomalous stock bull is more important than ever. Not only is the Fed deep into its 12th rate-hike cycle of the past half-century or so, it’s discussing starting to normalize its grotesque QE-ballooned balance sheet. Investors in a largely-artificial quantitative-easing-fueled late-stage stock bull ought to be terrified by the prospects of quantitative tightening soon being unleashed!

The Fed’s QE giveth, so the Fed’s QT taketh away. Literally trillions of dollars of capital evoked out of nothing by the Fed to monetize bonds directly and indirectly bid stock markets higher. The Fed’s deep intertwinement in this stock bull’s fortunes is easiest to understand with a chart. Here the SPX in blue is superimposed over its implied-volatility index, the famous VIX that acts as a proxy for popular greed and fear.

This anomalous stock bull was again birthed in March 2009 in the wake of the first true stock panic since 1907. After that epic maelstrom of fear fueled such an extreme plummet to climax a 57% bear market, a new bull was indeed overdue despite rampant bearishness and pessimism. The very trading day before the SPX bottomed, I wrote a hardcore contrarian essay explaining why a major new bull market was imminent.

Back in early 2009 stock-market valuations were so low after the panic that a new bull was fully justified fundamentally. And its first four years or so played out perfectly normally. Between early 2009 and late 2012, this bull market’s trajectory was typical. It rocketed higher initially out of deep bear lows, but those gains moderated as this bull matured. And its upside progress was punctuated by healthy major corrections.

Stock-market selloffs are generally defined in set ranges. Anything under 4% isn’t worth classifying, it is just normal market noise. Then from 4% to 10%, selloffs become pullbacks. Beyond that in the 10%-to-20% range are corrections. Selloffs greater than 20% are formally considered bear markets. In both 2010 and 2011 the SPX suffered major corrections in the upper teens, which are essential to rebalance sentiment.

As bull markets power higher, greed naturally grows among investors and speculators. They start to get very complacent and expect higher stocks indefinitely. Eventually this metastasizes into euphoria and even hubris. Major corrections, big and sharp mid-bull selloffs, rekindle fear to offset excessive greed and keep bulls healthy. Interestingly even in 2010 and 2011 the Fed played a key role in stock-market timing.

Those early bull years’ major corrections coincided exactly with the ends of the Fed’s first and second quantitative-easing campaigns. QE is an extreme monetary-policy measure central banks can use after they force interest rates, their normal tool, down to zero. The Fed’s zero-interest-rate policy went live in mid-December 2008 in response to that first stock panic in a century, and QE1 then QE2 soon followed.

Quantitative easing involves creating new money out of thin air to buy up bonds, effectively monetizing debt. While QE1 and QE2 certainly caused market distortions, both campaigns had predetermined sizes and durations. When traders knew a particular QE campaign was nearing its end, they started selling stocks which drove the major corrections. So the Fed decided to change tactics when it launched QE3.

As the SPX approached 1450 in late 2012, that normal stock-market bull was topping due to expensive valuations. After peaking in April, stock markets started rolling over heading into that year’s presidential election. Stock-market fortunes in the final several months leading into elections can greatly sway their outcomes. So in mid-September 2012 less than 8 weeks before the election, a very-political Fed hatched QE3.

QE3 was radically different from QE1 and QE2 in that it was totally open-ended. Unlike its predecessors, QE3 had no predetermined size or duration! So stock traders couldn’t anticipate when QE3 would end or how big it would get. Stock markets surged on QE3’s announcement and subsequent expansion a few months later. Fed officials started to deftly use QE3’s inherent ambiguity to herd stock traders’ psychology.

Whenever the stock markets started to sell off, Fed officials would rush to their microphones to reassure traders that QE3 could be expanded anytime if necessary. Those implicit promises of central-bank intervention quickly truncated all nascent selloffs before they could reach correction territory. Traders realized that the Fed was effectively backstoppingthe stock markets! So greed flourished unchecked by corrections.

This stock bull went from normal between 2009 to 2012 to literally central-bank conjured from 2013 on! The Fed’s QE3-expansion promises so enthralled traders that the SPX went an astounding 3.6 years without a correction between late 2011 to mid-2015, one of the longest-such spans ever. With the Fed jawboning negating healthy sentiment-rebalancing corrections, sentiment grew ever more greedy and complacent.

QE3 was finally wound down in late 2014, leading to the Fed-conjured stock bull stalling out. Without central-bank money printing behind it, the stock-market levitation between 2013 to 2015 never would have happened! One of the most-damning charts of recent years shows the SPX perfectly tracking the growth in the Fed’s balance sheet as its monetized bonds accumulated there. This stock bull is largely fake.

Without the Fed’s QE firehose blasting new money into the system, stock-market corrections resumed in mid-2015 and early 2016. After topping in May 2015 not much higher than QE3-ending levels, the SPX drifted sideways to lower for fully 13.7 months. That too should’ve proven this artificially-extended bull’s top, giving way to the overdue subsequent bear. But it was miraculously short-circuited by the Brexit vote.

Heading into late June last year, Wall Street was forecasting a sharp global stock-market selloff if British people actually voted to leave the EU. What was seen as a low-probability outcome promised to unleash all kinds of uncertainty and chaos. And indeed when that Brexit vote surprised and passed, the SPX fell sharply for a couple trading days. Then meddling central banks stepped in assuring they were ready to intervene.

So this tired old bull again started surging to new record highs in July and August, although they were not much better than May 2015’s. After that euphoric surge on hopes for post-Brexit-vote central-bank easings, the SPX started to roll over again heading into the US presidential election. Again Wall Street warned just like Brexit that a Trump win would ignite a major stock-market selloff, and again proved dead wrong.

The shocking post-election stock surge has been called a Trumpgasm, or Trumphoria. Capital flooded into stocks for a variety of reasons. In addition to hopes for far-superior government policies boosting corporate profits, funds rushed to buy to chase good year-end gains to report to their investors. And the resulting stock-market record highs, and fevered anticipation for big tax cuts, started seducing investors back.

This exuberant psychology greatly intensified this year, with the SPX periodically surging to series of new record highs on political news fanning investors’ optimism. Trump approved long-stalled big oil pipelines in January, teased on coming big tax cuts in early February, and sounded presidential while addressing the Congress as March dawned. That stock elation unleashed big spending, which boosted corporate profits.

But this Fed-goosed stock bull was already very long in the tooth, and stock valuations were already near formal bubble territory, even before Trump was elected. The resulting Trumphoria surge on hopes for big tax cuts soon really exacerbated serious pre-election risks! That included extending the span since the end of the last SPX correction to 16.5 months. Normal healthy bull markets see correction-grade selloffs annually.

Between the SPX’s original top soon after QE3 ended in May 2015 and Election Day 2016, at best stock markets simply ground sideways. At worst they were rolling over into what should’ve grown into a major new bear. Trumphoria short-circuited all that, sending stocks sharply higher and delaying the inevitable cyclical reckoning. By mid-June the SPX had rocketed a stunning 14.7% higher since Election Day alone!

An ominous side effect of that anomalous late-bull surge was extremely-low volatility, with all kinds of low-volatility records set. The VIX S&P 500 implied-volatility index on this chart reflects that, slumping to multi-decade lows in recent months! Low volatility reflects low fear and high complacency, the exact herd sentiment ubiquitous at major bull-market toppings. Just like stock markets, volatility is forever cyclical too.

Volatility often skyrockets off exceptional lows, as the great sentiment pendulum must swing back to fear after peaking deep in the greed side of its arc. And the only thing that generates fear late in stock bulls is sharp selloffs. No matter how bad news is, euphoric investors happily ignore it if it doesn’t drive stocks lower. But eventually some catalyst always arrives, usually unforeseen, that finally stakes the geriatric bull.

When the last stock bulls peaked in March 2000 and October 2007, there was no specific news that killed them. Lofty euphoric stock markets simply started gradually rolling over, mostly through relatively-minor down days which generated little fear. These modest grinds lower kept most investors unaware of the waking bears, boiling them slowly like the proverbial frog in the pot. But even little losses eventually add up.

Since nearly all the amazing stock-market gains between late 2012 to mid-2015 were directly fueled by the Fed’s QE3 money printing, fears of the coming quantitative tightening may prove the bull-slaying catalyst. The Fed conjured money out of thin air to buy bonds in QE, and it will destroy that very money by selling bonds in QT. QT’s capital outflows should prove as bearish for stocks as QE’s inflows were bullish!

The FOMC actually started discussing QT at its early-May meeting, and is planning to start implementing to begin unwinding the QE bond monetizations later this year. Prudent investors will anticipate QT even before it begins, and plenty will pre-emptively sell. QT has profoundly-bearish implications for these QE-boosted stock markets. The unwinding of the Fed’s massive QE-bloated balance sheet is unprecedented.

Back in the first 8 months of 2008 before that stock panic, the Fed’s balance sheet averaged $849b. By February 2015, it had ballooned to a freakish $4474b. That’s up a staggering 427% or $3625b over 6.5 years of QE! QE levitated the stock markets in two primary ways. That Fed bond buying bullied yields to artificial lows, forcing bond investors starving for yields to buy far-riskier stocks that were paying dividends.

More importantly, those unnatural contrived extremely-low yields courtesy of QE fueled a boom in stock buybacks by corporations unlike anything ever witnessed. American companies took advantage of the crazy-low interest rates to literally borrow trillions of dollars to buy back their own stocks! Between QE3’s launch and Trump’s victory, corporate stock buybacks were the dominant source of stock-market capital inflows.

QT along with the Fed’s rate-hike cycle will allow bond yields to rise again, eventually greatly retarding corporations’ desire and ability to borrow vast sums of money to use to manipulate their own stock prices higher. In late June, the Fed’s balance sheet was still way up at an extreme $4430b. These QE-inflated stock markets have never experienced QT, and it ain’t gonna be pretty no matter how slowly QT is implemented.

While the Yellen Fed is far too cowardly to fully reverse $3.6t worth of QE since late 2008, even a trillion or two of QT over the coming years is going to wreak havoc on these QE-levitated stock markets. That’s a serious problem for today’s extreme Fed-goosed bull with a rotten fundamental foundation. Underlying corporate earnings never supported such extreme record stock prices, and the coming reckoning is unavoidable.

Regardless of the Fed’s balance sheet, quantitative tightening, or valuations, the near-record-low VIX slumping into the 9s in May and June shows these stock markets are ripe for a major selloff anyway. At absolute minimum, it needs to be a serious correction approaching 20%. But with this stock bull so big, so old, and so fake thanks to the Fed, that selloff is almost certain to evolve into the long-overdue next bear.

And investors aren’t taking the threat of a new bear seriously. Crossing the bear threshold just requires a 20% retreat. Even such a baby bear would erase all SPX gains since mid-2014. A normal bear market at this stage in the Long Valuation Waves is actually 50%, cutting stock prices in half! That would wipe out the great majority of this entire mighty stock bull, dragging the SPX all the way back down to mid-2010 levels.

Even more ominously, bear markets naturally following bulls tend to be proportional. That makes sense since bears’ job is to rebalance sentiment and work off overvalued conditions. So there’s a high chance the coming bear after such an anomalous Fed-goosed bull won’t stop at 50%. The downside risks from here are utterly mindboggling after such a huge bull driven by extreme central-bank easing instead of profits!

And that finally brings us to valuations, this old stock bull’s core problem. This next chart looks at the SPX superimposed over a couple key valuation metrics. Both are derived from averaging the trailing-twelve-month price-to-earnings ratios of all 500 elite SPX companies. The light-blue line is their simple average, while the dark-blue one is weighted by market capitalization. Today’s valuations ought to terrify investors.

Unfortunately today corporate earnings are intentionally obscured by Wall Street to mask the dangerous overvaluation that is rampant. Analysts make up blatant fictions including forward earnings, which are literally guesses about what companies will earn in the coming year! These almost always prove wildly optimistic. Analysts also look at adjusted earnings, another Pollyannaish farce where companies ignore expenses.

Wall Street also plays a deceptive estimate game to make quarterly-earnings results look way better than they really are. Instead of comparing actual hard quarterly profits with the same quarter a year earlier, they intentionally lowball estimates so companies beat regardless of their actual earnings trends. Investors are being bamboozled, with the only honest way of measuring corporate profits buried and forgotten.

That is based on generally-accepted accounting principles (GAAP) which are required when companies actually report to regulators. The only righteous way to measure price-to-earnings ratios is using the last four quarters of GAAP profits, or trailing twelve months. Those numbers are hard, established in the real world based on real sales and real expenses. They are not mere estimates like totally-bogus forward earnings.

Every month at Zeal we look at the TTM P/Es of all 500 SPX companies. At the end of May, the simple average of all SPX companies actually earning profits so they can have P/Es was an astounding 27.5x! That is nearly in bubble territory, just as Trump had warned about during his campaign. 14x earnings is the historical fair value over a century and a quarter, and double that at 28x is where bubble levels start.

If you study the history of the stock markets, stock prices never do well for long starting from bubble valuations. Such extreme stock prices relative to underlying corporate earnings streams actually herald the births of major new bear markets. Again these usually cut stock prices in half. So buying stocks here, late in a huge old bull market artificially levitated by the Fed, is the height of folly. Massive losses are inevitable.

Remember stock markets perpetually meander through alternating bull-bear cycles. Back in late 2012 before the Fed stepped in to try and brazenly short-circuit these valuation-driven cycles, valuations were actually in a secular-bear downtrend. After secular bulls drive valuations to bubble extremes, with greed forcing stock prices far beyond underlying corporate earnings, secular bears emerge to reverse these excesses.

During secular bears, stock prices grind sideways on balance for long enough for earnings to catch up with lofty stock prices. Before QE3 temporarily broke stock-market cycles, that process had been happening as normal between 2000 to 2012. Secular bears don’t end until valuations get to half fair value, 7x earnings. So instead of being near bubble levels, valuations would normally be between 7x to 10x today.

That’s the massive downside risk stocks face due to their Fed-conjured bubble valuations! While the red line above shows the actual SPX, the white line shows where it would be trading at 14x fair value. Even that is way down around 1245 today, roughly half current levels. But mean reversions from extremes nearly always overshoot in the opposite direction, so the potential SPX bear-market bottom is much lower.

Sadly Wall Street will never bother telling investors that valuations matter. Stock-market history proves beyond all doubt that buying stocks high in valuation terms nearly always leads to considerable-to-huge losses. All the financial industry cares about is keeping people fully invested no matter what, since that maximizes their fees derived from percentages of assets under management. Talk about a conflict of interest!

The more expensive stocks are in valuation terms when they are purchased, the worse the subsequent returns will be. And no matter how awesome Trump’s policies may ultimately prove, they aren’t going to rescue corporate profits anytime soon. With all Trump’s political turmoil and the Republican lawmakers’ unproductive infighting, the big tax cuts investors hope for aren’t coming until 2018 at best. Maybe never.

In the meantime, corporate profits face major headwinds in the coming quarters that are likely to leave stock valuations even more extreme. Q1’17 corporate earnings surged almost certainly due to all the Trumphoria optimism. Between hopes for big tax cuts soon, and the wealth effect from record-high US stock markets, spending was far beyond normal. That will mean revert lower as hard political realities set in.

All kinds of hard economic data have already started deteriorating considerably since peak Trumphoria hit as March dawned. The consumers and companies spending big in the first quarter on hopes for big tax cuts soon are starting to pull in their horns. That will likely result in weaker corporate-profits growth, if not outright shrinkage, going forward. Lower profits at these stock prices will force valuations into bubble-dom.

The stock markets’ lofty valuations before the Trumpgasm and near-bubble valuations since are a very serious problem that can only be resolved by an overdue major bear market! Only that will drag stock prices low enough to where existing and future corporate earnings will support reasonable valuations again. Investors don’t believe a new bear market is possible, but they never do when bull markets are topping.

Investors really need to lighten up on their stock-heavy portfolios, or put stop losses in place, to protect themselves from the coming valuation mean reversion in the form of a major new stock bear. Cash is king in bear markets, as its buying power increases as stock prices fall. Investors who hold cash during a 50% bear market can double their stock holdings at the bottom by buying back their stocks at half price!

Put options on the leading SPY S&P 500 ETF can be used to hedge downside risks. They are cheap now with euphoria rampant, but their prices will surge quickly when stocks start selling off materially. Even better than cash and SPY puts is gold, the anti-stock trade. Gold is a rare asset that tends to move counter to stock markets, leading to soaring investment demand for portfolio diversification when stocks fall.

Gold surged nearly 30% higher in the first half of 2016 in a new bull run that was initially sparked by the last major correction in stock markets early last year. If the stock markets indeed roll over into a new bear in 2017, gold’s coming gains should be much greater. And they will be dwarfed by those of the best gold miners’ stocks, whose profits leverage gold’s gains. Gold stocks rocketed 182% higher in 2016’s first half!

Absolutely essential in bear markets is cultivating excellent contrarian intelligence sources. That’s our specialty at Zeal. After decades studying the markets and trading, we really walk the contrarian walk. We buy low when few others will, so we can later sell high when few others can. While Wall Street will deny the coming stock-market bear all the way down, we will help you both understand it and prosper during it.

We’ve long published acclaimed weekly and monthly newsletters for speculators and investors. They draw on our vast experience, knowledge, wisdom, and ongoing research to explain what’s going on in the markets, why, and how to trade them with specific stocks. As of the end of Q1, all 928 stock trades recommended to our newsletter subscribers in real-time since 2001 averaged stellar annualized realized gains of +22.0%! For only $10 per issue, you can learn to think, trade, and thrive like a contrarian. Subscribe today!

The bottom line is today’s euphoric near-record stock markets are hyper-risky. They are trading near bubble valuations thanks to the stunning post-election rally. Such lofty stock prices are risky any time, but exceedingly dangerous late in an enormous bull market artificially extended by the Fed. A major new bear market is long overdue that will at least cut stock prices in half. Don’t be fooled by the extreme complacency.

Prudent investors have to overcome this groupthink herd euphoria and protect themselves from what’s coming. That means lightening up on overvalued stocks, building cash, and buying gold. Central banks have a long history of trying and failing to eliminate stock-market cycles. The longer they are artificially suppressed, the worse the inevitable reckoning as these inexorable market cycles resume with a vengeance.

- Source, Silver Doctors