Guest Post: I've Got a Funny Feeling About the Stock Market

Tyler Durden's picture

Submitted by Charles Hugh Smith from Of Two Minds

Guest Post: I've Got a Funny Feeling About the Stock Market

The dollar has reached a point of double-bind for the Fed: push it down further or allow it to rise, it won't matter: either way, stocks will fall off a cliff.

I've got a funny feeling that all the ramp-and-camp, extend-and-pretend POMO games propping up stocks are about to stop working.
That would of course trigger a long, deep slide in equities, because as we all know, it's the Federal Reserve's games which have goosed the market to its current lofty heights. The market's confidence in the Bernanke Put--that is, the belief that the Fed will never let stocks decline-- remains supremely undimmed.

A lot of very good technical analysts see sentiment reaching lows which usually mark market bottoms. I am not so sure about this interpretation, for the investors intelligence readings are still complacently bullish.

Other very good technical analysts haven't yet seen a break in the long-term uptrend, so they too have reservations about any real decline.

Various Wall Street analysts are predicting a "mild correction" of 7% to 10%, after which it's off to the races once again--a pause that refreshes the permanent Bull.

I've got a funny feeling that it's lose-lose time for the Fed's games.
here's the basic game plan: inject tens of billions of free money into the "risk trade," i.e. equities and commodities, ramp the futures markets when volume and liquidity are low, and crush the U.S. dollar.

It's practically a perfect inverse correlation: when the dollar tanks, stocks move higher, and when stocks hit bottom then the dollar peaks. Think see-saw: when one tops out, the other hits bottom, and vice versa.

Interestingly, there is a rough correlation with the 40-week (9 month) cycle that many chartists watch. If that holds in the chart of the dollar, then the dollar should rise to a near-term peak in about 8 to 12 weeks. That further suggests stocks will crater.

Notice that the dollar has been driven down to an important inflection point. If the Fed forces it below the 75 level, then that opens the way to 72 and a careening collapse below the line-in-the-sand at 71.

There's an inherent limit to the "drive the dollar down to boost equities" game: inflation, which is already on track to hit 8.3% in 2011 (via Zero hedge).

For there's another see-saw dynamic: the lower you push the dollar, the more all the imports the U.S. depends on cost, generating a loss of purchasing power that is often called inflation.

Here is a simple real-world definition: you pay more for the same (or smaller) goods and (degrading) services than you did in the recent past, though your wages have been stagnant for decades.

Though the Ministry of Propaganda is running full-tilt pumping out statistics that "prove" inflation is near-zero, the recent "you can't eat iPads" heckling of a Fed official reflect the growing disbelief in these official pronouncements.

So here's the lose-lose double-bind: if the Fed continues destroying the dollar, then they will feed the rising-input-costs monster which devours corporate profits like a 10-year old devours Oreos. In a climate where consumers' incomes haven't risen for decades in real terms, passing on higher prices is a non-starter.

So profits will take a hit, and since the market has priced in ever-higher profits, the market will plummet when profits "unexpectedly" decline.

But if the Fed insists on pushing the dollar below 75 in the hopes of pumping up equities, they risk triggering a meltdown of the dollar globally and forcefeeding the rising-input-costs monster until a positive feedback loop kicks in and inflation sinks its teeth into the economy. As noted above, that will destroy corporate profits and thus the stock market's lofty valuations.

I also have a funny feeling about this chart. The NASDAQ, heavily dependent on a few superstars like AAPL and riddled with gaps all the way up from its lows in August, could be topping out not for a few weeks but for years.

The always excellent and provocative Imperial Economics blog of B.C. has published some eye-opening charts which overlay the current bullish utopia with those from previous eras. The sobering conclusion is that if history echoes, then the market is about to roll over in a massive decline that will last a year or two.

As I noted in Sorry, Fed and People's Bank of China: You Can't Have It Both Ways (March 15, 2011), you can't pump up money supply and credit to goose "risk trades" in stocks and commodities without inflating asset bubbles and triggering runaway input-costs, i.e. inflation that destroys profit margins and impoverishes stagnant-wage households.

But if the Fed takes its hands off the game controller and allows the dollar to rise, then equities crash anyway.

In other words, the dollar is at a point where either path leads to stocks crashing. Go ahead and destroy the dollar, and the rising-input-costs monster will gut stocks and impoverish households. Back off and let the dollar rise, and the risk trades (equities and commodities) will plummet.

Take your pick: the result is the same.

Disclosure: I opened a long position in UUP, the U.S. dollar ETF yesterday, and added to my QID short against the NASDAQ 100.

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jdrose1985's picture

You can forget about your personal credit in the near future.

It'll be worthless.

jdrose1985's picture

Junked me without a rebuttal.

Pity the fool who lives on credit, we're headed to a cash economy as the "long emergency" takes more form.

the mad hatter's picture

technical analysis? who needs technical analysis?

BTFD while the printing presses are running full speed. the day that bernanke raises interest rates and/or stops POMO will be the day that i sell.

Doña K's picture

It may either be too late, or you may think that it is just a dip and buy more. They are smarter than us. Why? they have the info and we don't timing is everything. Look out.

Everyman's picture

Here is some information about the "Liquidity Hoarding" from the Fed.


Seems that Fed is Suprised that the banksters are keeping the money.

What the hell were they thinking???

huntergvl's picture

NOT smarter than us....just criminals. They telegraph their moves though. For instance, if the market jumps on April 1st, we're still good. First of the month has been green for awhile, although we had a miss either this month or last. That might be a new trend beginning.

Every time a FEDHED, gives a speech somewhere, they are putting out clues to what they will say (what they will do is obvious QE3 is a lock, but they don't have to necessarily call it QE3. They have generated such a large balance sheet, that they can effectively roll over the maturing treasuries without increasing their balance sheet, for some time). But, they will have to telegraph their intentions in advance of the April FOMC announcements, or risk some dynamism in the markets which upsets them (unless it's straight up).

I'm sure everyone saw the G7 bailout and Japan printing money like an addict going through johns and crank. Japan's deficit far exceeds the U.S., but still 'THEY PRINT,' will the full consent and backing of all the G7.

Currently, there is absolutely NO downside to running up massive deficits by printing money and increasing the debt ceiling to infinity. The consequences are issues for tomorrow and especially for another legislature and another administration. They might let the market correct down 10-15% to get all the retail investor's attention just so they can easily justify QE3 and this time go for the gusto.....$600 Billion (really $900 billion minimum) is chump change. If I was a scummy Central Bankster, I'd let the market dip hard and fast and then come to the rescue with a $3 Trillion QE.

So, I am risk on, risk off, risk on, risk off, like the Karate Kid, and more skittish than a virgin on prom night, but I am still trading and after all this time (since '07), I remember that which matters most.....


We should call the 2011-2020 decade, the Matrix Decade. Reality is on Hiatus for sure.

Ben Trinanke's picture

since i am new in here  i might ask a question that seems pretty dump for you, but what do you actually mean by BTFD???


Waterfallsparkles's picture

I think it means Buy The Frigging Dip.

New_Meat's picture

and we need to infect the newbie with other memes ;-)  He's required to view all of the silver bearz, starting here:

- Ned

goldenbuddha454's picture

Credit is limitless in Ben Bernochio's world.  Just print more money and all is well.  When he gets in front of Ron Paul and says that QE is designed to temporarily buy and hold assets adding them to the Fed's balance sheet I wanna throw up in my mouth!  Bernochio's nose grows atleast a quarter inch a day.  In essence, the Fed, an American entity, is buying what debt noone else will and adding it to the balance sheet as a so-called asset, huh?  An asset, U.S. debt?  I guess I can call my credit card company and tell them I'm not going to pay this months statement because its really an asset which if they're interested I will sell it back to them to be paid back ten years from now at 2.1% interest.

jdrose1985's picture

You don't even need to call them.

Your signature is the asset. Your energy has been robbed from and reissued to you your entire consumeristic life purely for the profit of the Chapter 11 bankrupted united states (since 1933) and its evil IMF overlords. Yikes!

Speaker-Rep. James Traficant, Jr. (Ohio) addressing the House in 1993:

 "Mr. Speaker, we are here now in chapter 11. Members of Congress are
official trustees presiding over the greatest reorganization of any Bankrupt
entity in world history; the U.S. Government.


SoCalBusted's picture

I miss Jim, "Beam me up Scotty".  He got out of prison a few years ago.  He seemed a bit crazy 20-30 years ago.  Not so much now.

Moon Pie's picture

I used to watch Traficant on CSPAN.  Wish I had a DVR then.  Dude was off the hook and in some ways, very prescient.  He whacked the IRS beehive and got done over that.  I will always believe that.  The Feds could hogtie just about any congressman/woman if they wanted to.  They went after "Beam me up.." Jimmy cause they could and cause he laid into the system every time he could.  He is no saint, but none of them are.

Watauga's picture

Anyone seen SHUTTER ISLAND?  DiCaprio's character is lost in either his mind or hell on Earth.  Never can tell.  The key to making him think he has lost his mind, or to making him appear to have lost his mind if he ever escapes the island and talks, is to ensure he has no credibility because of what appears to be his insanity.  Perhaps, however, he is completely sane?  That is what they did to Traficant.  Made him look like he was borderline insane.  Then, it was easy to whisk him off to jail on trumped up charges.  Sure, he helped the process along, but they enabled his failures to ensure no one cared about him being removed from office.  It was masterful.  Or, he really was off his rocker and had no business being in Congress, EVEN IF HE WAS RIGHT most of the time about what was going on in government!

chumbawamba's picture

Why don't you throw up on the television set, or perhaps an effigy of Berjackass instead?  I imagine that would be less unpleasant than throwing up in your own mouth.  Maybe you canmake a life-sized effigy of Berjackhole and then throw up in its mouth.  That would be rather satisfying, I imagine.

I am Chumbawamba.

eddiebe's picture

Personal credit? What does that mean? That we wont be able to borrow anymore? Maybe so, but why do you think not?

 Personally I think now is the time to borrow as much as possible with a fixed interest rate long term. With a huge wave of inflation coming, the payments made in a few years will amount to pennies on the dollar.

SunSword's picture

Soon...very soon...not quite yet. But soon it will be time to dump any cars you have and buy brand new top of the line autos on credit. Timing will be 80% of this maneuver.

IQ 145's picture

 agree with the premise of the article; the top is in from Feb.22; we are now in a bear market.

Arch Duke Ferdinand's picture

A strong dollar allows commodity prices to drop.

Watch the selling of Gold, Silver and Oil for Food.

 7 reasons food shortages will become a global crisis...

OT Wrong Side Up....OT Comedy...2 min vid...

Judge Judy Scheinlok's picture

Right on Duke.

Do you know that farmers can order seed that specifies how much sunlight the grow cycle has.

Example; "I want maximum yield in 90 day of sunshine", or "I want maximum yield in 95 day of sunshine".

Fucking-A. How to engineer a global food crisis? Kill off the Heirloom, let the rise of GMO take over the world. Walmart Seeds bitchez.

rocker's picture

Wow, which do I respond to. People will sell their gold, silver, and oil for food.  Huh, you mean the people who had no investments and are selling family heirlooms. Wow. Or do you mean the CB's who are going to short everything and take all that money the Bernanke put in the markets just as the individual investor wets his feet?

And on the seed thing. Nothing surprises me anymore. Nothing. Monsanto has figured out how to sell seeds that will not produce fertile seeds so you have to buy them again next year.  And to top it off.  Our local Walmart is selling what they call "Seeding Potatoes".  I have never seen any of these at a Walmart ever. Are they O.K. to eat as is?  Just what the hell is the difference between a seeding potato and the regular ones you buy.  I always cut a few up every spring and stuck them in the ground.  

As I've said before. Sometimes I need the lady to pinch me to make sure all this shit is real. Either way. If Gold, Silver, and PM's do dip with the market. I do think the market is in for a correction. On PMs, Buy the Fukn' Dip.  Don't sell yet. This is far from over.  QE3 is only a rumor, then we have 4 and 5.  

Sam Clemons's picture

On PMs, just put up a chart that backs your thesis.  They may be tired in the medium-term, but aren't close to over.

Watauga's picture

Gold to $1225--buy.

Silver to $23--buy.

Long term bull in PMs.  Gold to $5000+ and silver to $100+.

As for food crisis, MENA, Japan meltdown, U.S. entering third war (or expanding the world war), risks to oil, nuclear, and coal going forward. . .  and we have a charlatan and pretender in charge.  What a country.

Time to re-read, by the way, THE CAMP OF THE SAINTS. 

Yen Cross's picture

I hate getting Smacked Judy. I'm rebuilding this country. P.S. who was it Eisenhower sent in  to rebuild Japan> JUDY!!!????????????

dogbreath's picture

nice, which reminded me of this


so much bullshit on this planet right now

10kby2k's picture

When something is win-win beyond all rational violently turns to lose-lose.

Oh regional Indian's picture

Wise words 10k, very well said.


TruthInSunshine's picture

Time for the cheap deep OTM puts, IMO, and yes, I'm calling out Bernanke for being incompetent and less than the magician (much more like the charlatan) some claim he is, as I did in 2007, where I made enough money to expand my horizons.

And yes, I'm also doing what I'm saying.

Bernanke's fucked, he was going to be fucked anyways *after fucking America and the world*, but Japan was the swan that shat on him, and accelerated his demise.

Look for NerObama to throw Bernanke out to the wolves soon, in a vicious display as to how ugly politics can really get. And the excuse NerObama will use is -


-- Bernanke stated he would not support bailing out states, counties and cities.

Every once in a while, I get a good thesis going, and sometimes, they even pan out.


p.s. - You technical/pattern guys and chartists - give me an overlay of 2007/2008 before the crash happened and the last 2 or 3 months. Thanks.

spekulatn's picture

When something is win-win beyond all rational violently turns to lose-lose.


Good point 10kby2k. Music to the ears of a certain semi-retired speculator hell bent on change.



Lets_Eat_Ben's picture

Long the dollar?!?!? The hell you say. It sounds just crazy enough to work, but I'd feel much better shorting the markets. Good thread

Fred Hayek's picture

Interesting stuff, as always, Mr. Smith.  Thank you.

10kby2k's picture

The bold trade: Sell your commodities to trend followers and go short equites and then buy your commodities back at a deep discount.

Oh regional Indian's picture

Dangerous waters those. Timing is everything and something tells me we cannot see the clock.


oygevalt's picture

So now you're not hawking your website, but are speaking in Yoda-isms?  Thanks for mixing it up.

Dr. Porkchop's picture

The eye that looks ahead to the safe course is closed forever.


Paul Muad'Dib

thegr8whorebabylon's picture

Pass the spice please, Porkchop.

10kby2k's picture

Very dangerous. That is what i would do with other peoples money.....more cautious and measured with my own.

Jason T's picture

I did it last week.. bought SH at about 42.20, UUP 22.10 and sold a good chunk of SLV and CEF.  Too much going on for the risk trade and that $52 trillion in US$ Debt makes that dollar one hell of a shorted currency.  No flight to safety, flight to pay off debt and deleverage.

thebark's picture

bold I dare say....and probably true...but when I ask? does silver go to $200 first? if the dollar collapses BEFORE the market....then gold and silver will go parabolic...

tiger7905's picture

And here is something that will only help silver increase. India to increase silver bullion for investment purposes 25% in 2011.

Watauga's picture

Not so bold, as it is a sure thing--on a long enough timeline.

donde1's picture

So do I sell all of my silver to buy back in after it drops???