When the markets crashed in 2008, the Fed came to the rescue by bailing out the banks with massive QE programs. QE or Quantitative Easing is just a fancy phrase for printing money and handing it over to the banks to spend in the stock markets.
If you look at a chart of the S&P 500 from 1970 to present, you can see that the Feds QE program from 2008 to present worked to elevate the stock market to levels never before seen in history. This is a classic illustration of a stock market bubble.
The financially ignorant public looks at the stock market to judge how well the economy is doing, even though the stock market is not necessarily a good indicator for economic growth. The Fed and political elites knew the masses would fall for this Ponzi scheme and they used it to their advantage to make their policies look good.
This over-inflated stock market provided a false sense of economic growth over the past 9 years by forcing the stock market higher with massive amounts of liquidity while the actual economy was barley growing at all.
This historic rally in stocks has created historically high PE’s as the current Shiller PE ratio is at 28.16, which is getting very close to the PE of just over 31 right before the stock market crash of 1930. A normal PE is around 16.
A market which is overvalued like the current stock market is high risk and should be avoided, even if it has a chance to go a little higher. The risk to reward is just too high.
For the past 9 years the Fed also lowered rates to zero to try to incentivize investors to buy real estate and to get business owners to borrow more money to invest in their businesses which would help grow the economy. The problem is most business owners are financially savvy enough to see through the charade and didn’t take the bait.
However, the real estate market has been boosted to new bubble heights similar to where it was the last time the real estate bubble popped. Market valuations for housing across the nation have met or exceeded the high valuations last seen in 2007.
In addition, the frenzy of current market activity to buy homes is similar to what I remember in 2007. There are multiple investors competing with multiple owner occupant home buyers for a limited amount of available inventory and this is causing home prices to skyrocket.
Once the stock market reverses course and starts to decline the Fed will backtrack on interest rate hikes and eventually be forced into more QE.
I believe the Fed will continue to support rates by continuing to buy treasury bonds and printing dollars, otherwise if they stop the Ponzi scheme, the real economy will be revealed and we will see a collapse of the system.
The only problem is that every Ponzi scheme reaches a point of no return and implodes upon itself. I think we are nearing that point in time now and a deflationary collapse of the global financial system could come within the next two years and possibly by the end of this year followed by a hyper-inflationary period.
In addition, many think Trump knows that the system needs to reset in order to fix the economy and has plans to stop the manipulation and allow the natural economic forces to collapse the current system in order to rebuild upon a stronger and purely capitalistic monetary system.
Unless you are a trader and watch the market like I do, you could be blindsided by a stock market crash in the next year or so. The best way to protect yourself is to lighten your exposure to stocks and increase your precious metal positions.
You will not only protect yourself against a historical crash of the system, but you will benefit from the massive transfer of wealth that’s going to take place when this massive bubble bursts.
The bull market has resumed in gold after a brief retracement from option expiry at the end of the month of January. The rebound has been strong and we are now pushing against short term resistance around 1229.
Once gold closes above the 1229 level, the next major resistance level will be around 1280. I expect once gold pushes through 1229; we will see a rather quick move up to the 1280 level, possibly as soon as next week.
Stock Market: (SPY) (QQQ)
The DOW’s quick little blurb to breach 20,000 was very short lived and I think we will continue to see a gradual decline over the next couple of weeks. If I’m right and the DOW retraces down to close below the bottom channel line, then the decline in stocks should pick up steam.
If you are positioned in stocks, you might want to consider lightening your exposure and keep an eye on the charts over the next couple of weeks.
Energy Stocks: (XLE) (UNG) (USO) (LNG)
Crude oil has been consolidating for the past couple of weeks between 50 and 54, but if you look at the wedge pattern that has formed, it’s clear that it will be forced to break either up or down in the next few days.
The stochastic oscillator indicates a decline is due and if it breaks to the downside, we should see a significant decline from there.
A break to the upside would create a buy signal, at least for the short term.
Housing Market Stocks: (DHI) (TOL) (PHM)
Last week I explained how DR Horton gapped up and that usually those end up being short term surges which tend to retrace back down to fill the gap before resuming an upward trend again.
So far DHI has not filled the gap, so I expect it to continue down to fill the gap before any resumption to the upside.
The 10 Year Treasury bond still looks very weak to me. We saw a brief bounce off of support around 123 and now it’s consolidating within a narrow channel. My guess is we will continue to see weakness in bonds going forward and a break below the channel support line could indicate a major surge in interest rates and put additional pressure on real estate mortgage applications.
(SLW) January 2018 CALLS
(GDX) January 2018 CALLS
(ABX) January 2018 CALLS
(DHI) Short DHI only if bonds continue to fall below 123.50 and hold.
(PMH) Same thing for PMH.
Case-Shiller Home Prices Reach Record High In November (Right Before Rates Exploded Higher)
The good news - US home prices have never, ever, been higher according to Case-Shiller. The bad news - that was November's data. The ugly news - mortgage rates have exploded higher since then...
Ron Paul Warns: "Second Financial Bubble Going To Burst Soon... Even Trump Can't Stop It"
"By all appearances, President Trump is doing his damnedest to turn around the economy, revitalize jobs and bring back prosperity. But the larger trends are already in place; the cycle is turning, and the bust cannot be put off forever."